Decoding MCLR: Should you switch from Base Rate to MCLR?

Reserve Bank of India has directed all scheduled commercial banks to shift to MCLR (Marginal Cost of Funds based Lending Rate). This means all new loans sanctioned on or after April 1, 2016 will be linked to MCLR.

MCLR stands for marginal cost-based lending rate. Earlier, your loans were priced at a spread over the Base Rate. For instance, if the base rate was 9.5% p.a. and the spread was 50 bps for your risk profile and loan tenor, you will have to pay 10% p.a. on your loan. From April 1, 2016 MCLR will replace Base Rate. All the new loans will be offered at MCLR + Spread.

What is MCLR? What is the need to shift to MCLR? How is MCLR calculated? How does it affect you? These are some of the questions I would try to answer in this post.

Why MCLR (Marginal Cost of Funds based Lending Rate)?

You have been hearing about RBI has cut interest rates many times over the last two years. However, your home loan EMI has not gone down that quickly. Banks have been reluctant to pass on these rate cuts (in form of lower interest rates) to borrowers like you. Why?

Banks have been giving one excuse or the other for not reducing lending rates. Before MCLR, lending rate was linked to the Base Rate. There was just one base rate for all the loans. You were given loan at Base Rate + Spread. This Spread was constant during the term of the loan (could be changed only in case of default or breach of terms of the loan agreement). If the bank reduced Base Rate, interest rate on both new loans and old loans will go down.

In case of rate cuts by the Reserve Bank, banks could always say that even though the cost of fresh borrowing has gone down, they have legacy deposits for which the interest rate remains high.

There was nothing beyond a point that RBI could do to ensure quick transmission of interest rate cuts.

To counter this, RBI has introduced MCLR so that banks link their lending rates to marginal funding costs (cost of fresh or incremental borrowings).

With MCLR, the RBI wants to ensure that the lending costs are in line with the cost of fresh (incremental) borrowing. Hence, if the bank cuts the rates on deposits, it will automatically have to transmit the cut in deposit rates to lending rates. By cutting the deposit rates, the bank brings down its marginal cost of funds because it can raise deposits at a lower interest rate.

So, the rationale is simple. If you can borrow at lower rates, lend at lower rates.

How is MCLR calculated?

You can expect MCLR to be linked to fresh (incremental) cost of borrowing. However, there is more to it. Borrowing is not just rates of fixed deposits. It includes current account balances, savings account balances, wholesale borrowings, borrowings from RBI.

But there is more to it. Let’s look at various components of MCLR.

MarginalCostofFunds: This is cost of fresh (incremental) borrowing to the bank. It takes into account interest rates of different types of deposits (current, savings, term deposits etc). Marginal cost of funds is not just the deposits (borrowings) that the bank has accepted. There is some equity too. Hence, cost of equity is also considered.

Negative Carry on Cash Reserve Ratio: Banks have to keep a certain level (4% as on April 5, 2016) of their deposits with the Reserve Bank. This ratio is the Cash Reserve Ratio (CRR). Banks don’t earn any interest on the amount. Essentially, they can use 96% of the deposits for lending and the remaining 4% does not earn the bank anything. RBI allows some leeway for this with adjustment to the

Operating Costs: Bank’s costs are not limited to interest it pays on deposits. There are expenses on salaries, branch rent or other expenses that are not directly charged to the customers. Cost of raising funds is also included under this head.

Tenor Premium/Discount: Higher the loan tenor, higher the tenor premium. Tenor refers to the period of interest rate reset. Even though your loan tenor is 15 years but if the loan reset is done every year, 1-year MCLR will be applicable.

How many MCLRs?

The Reserve Bank has directed banks to set at least 5 MCLR rates viz. overnight, 1 month, 3 months, 6 months and 1 year. The banks can choose to have more (for longer tenors).

You might ask, which MCLR did I arrive at using the formula in the previous section? That depends on the distribution of bank’s deposits across various maturities. RBI has specified procedure to find out. You can refer to RBI Circular for the same.

Once you have arrived at marginal cost of funds with adjustment for CRR and operating costs and know the applicable tenor, you apply tenor premium/discount to arrive at other MCLRs.

For instance, if the MCLR was for 6 months, you will apply tenor discount for overnight, 1-month and 3-month MCLR. On the other hand, you will apply tenor premium for 1-year (or higher tenor) MCLR.

RBI has not specified how to calculate tenor premium/discount. It is bank’s discretion.

All the loans will be offered at applicable MCLR + Spread.

What about this spread?

MCLR is merely to assess the cost of funds to the banks.

The banks will also charge a premium based on your credit worthiness. The spread may depend on your credit score or bank’s assessment of your repayment ability.

The banks can change the spread in MCLR linked loans (could not do so earlier in base rate regime). However, it is not so easy.

The spread charged to a customer can be increased only in case of deterioration of credit risk profile of the borrower. Such decision must be supported by complete risk profile review of the borrower. Hence, increasing the spread may become operationally difficult for the banks.

When will Banks publish MCLR? When will the interest rate be reset?

The MCLR will be reviewed on a monthly basis i.e. banks will disclose MCLR for various tenors every month. All the new loans during the new month will be offered at latest MCLR +Spread.

However, your loan interest rate may not get revised every month. It will be done at the next interest rate reset date as provided under the loan agreement between you and the bank. This interest reset period cannot be greater than 1 year.

For instance, your loan is linked to 1-year MCLR (say 9.1% p.a.) and the next reset date is March 1, 2017. Even if 1- MCLR is revised downwards to 8.9% p.a. in May, 2016, you will have to wait for at least till March 2017 before a lower MCLR can apply to your loan. Please remember 1-year MCLR announced for the month of March 2017 will apply to your loan at the next reset date.

Reset period is at the discretion of banks. Kotak Mahindra Bank has chosen to reset home loan interest rates every six months (Kotak Mahindra Bank is using 6-month MCLR for home loans). On the other hand, SBI and ICICI Bank will reset home loan interest rates after 1 year (SBI and ICICI Bank are using 1-year MCLR for home loans).

These are the MCLR rates for various maturities announced by SBI.

You are not really concerned about how MCLR is calculated. Are you? You want to know how it affects you as a borrower. Will your monthly EMI go down after MCLR is introduced?

How does MCLR regime affect you?

In this section, I consider the borrowers who take fresh loans under MCLR regime.

At the outset, it appears that interest rate policy transmission should be much quicker in MCLR regime (as compared to Base Rate regime). MCLR is more transparent.

If the RBI cuts repo rates and cost of borrowing in the system goes down, you can expect reduction in your EMI much sooner.

The only issue is that you will have to wait till the next interest reset date before you get the benefit of lower interest rate. In such cases, you may consider refinancing your loan from another lender.

Since the MCLR has to be published every month, banks cannot hide their borrowing cost from the customers.

Do note MCLR is a double edged sword. Just as you expect interest rate cuts to be passed quickly, you must also expect interest rate hikes to be passed soon. However, I don’t think it matters much. Banks are always quick to pass on the interest rates hikes. It is when they have to reduce interest rates that they keep inventing excuses.

What about the existing borrowers?

MCLR is applicable to all loans made on or after April 1, 2016. If you borrowed on or before March 31, 2016, your loan will still be linked to base rate. However, you can switch from base rate to MCLR at mutually agreed terms between you and the bank. The bank can charge you a fee for the switch.

Should you switch your home loan from base rate to MCLR?

Too early to say. It depends on what conditions (fee etc) your bank is offering you for switch. You will not be able to switch back to Base Rate Regime. Additionally, consider the spread that the bank is offering under MCLR regime. If you are getting a better deal under MCLR regime, then you can switch.

With housing loans, you can always refinance your loan from a lender offering lower interest without prepayment penalty; hence the MCLR regime adds only limited value.

What will be the impact on other loans?

All floating rate loans sanctioned on or after April 1, 2016 will be under MCLR regime. Even fixed rate loans up to a tenor of 3 years will be brought under MCLR regime. Fixed rate with tenor of more than 3 years will be exempt from MCLR regime i.e. banks will have discretion in pricing the product.

Typically, personal loans are less than 3 years while tenor of a car loan exceeds 3 years. You can expect banks trying to push tenor of fixed rate loan products to over 3 years to avoid MCLR regime.

PersonalFinancePlan Take

I trust banks to find a way around MCLR. Hence, I am not sure of the extent to which borrowers will benefit from move to MCLR regime. Nonetheless, MCLR is clearly more transparent and it appears banks have less discretion.

Following section added on October 20, 2016

Mathematics behind decision to switch from Base Rate to MCLR

In this section, I will focus on the numbers that you need to work out to decide whether you should switch your loan from base rate to MCLR.

I will make many assumptions. For instance, I have assumed the base rate (+spread) and MCLR (+spread) will remain constant during the tenor of the loan. This assumption is extremely unlikely to hold true. However, it will give an idea about the difference a switch can make.

Banks charge a fee for switching your loan from base rate to MCLR. Banks may charge a fixed fee or a fee linked to your loan amount or use any other method. It is entirely bank’s discretion.

If you have to switch, total savings from the switch should comfortably exceed the switching fee. Remember you will have to pay service tax on the fee too.

Your decision will depend on many parameters:

Outstanding Loan amount: Higher the loan amount, higher the savings due to reduction in interest rate.

Let’s try to understand with the help of an example. I have considered two loan amounts of Rs 15 lacs and Rs35 lacs, loan tenor of 5, 10 and 20 years and different values of MCLR linked loan rates. Base rate (plus spread) is assumed constant at 9.8% p.a.

You can see the savings increase with the increase in loan amount, loan tenor and the rate differential.

Now you need to compare your savings with the switch fee that the bank is charging you. Additional point to note you pay the switch fee upfront while the cost saving is through a lower EMI every month.

There is an additional issue with the above approach.

Banks typically don’t change the EMI but only adjust the tenor. Hence, the above analysis may not be very useful.

With lower interest rate (under MCLR), bank will lower the tenor and keep the EMI same.

Let’s see the impact.

You may note that the absolute savings under the second method (reduction in tenor) are higher than the first method (reduction in EMI).

Under the second method, all the saving comes at the end of the loan tenor (since the EMI remains constant). Under the first method, you save a small amount every month in the form of EMI. That explains the difference.

If you need assistance in working out these numbers, you can try EmiCalculator website.

Given these numbers, what will you do?

You compare these savings with the switch cost. Switch to MCLR if the saving is significant.

You must also note the timing of cash flows.

For instance, under the second method, all the savings are at the end of the loan tenor.

For a loan of Rs 35 lacs (outstanding amount) and tenor of 20 years, you save 23.82 EMIs by switching from base rate to MCLR (9.25%). That is a cost savings of Rs 7.93 lacs.

Let’s suppose the bank asks a fee of Rs 50,000 for the switch. You have to pay Rs 50,000 for saving of Rs 7.93 lacs. Seems like a really good proposal.

However, do not ignore that the saving will come in 19th and 20th years while the switch fee has to be paid up front. You could have invested Rs 50,000.

Rs 50,000, if invested at 8% per annum, will yield Rs 2.33 lacs in 20 years. At 10%, it will grow to Rs 3.36 lacs. By the way, you could have discounted the savings and compared with Rs 50,000.

Even after adjustments, you can see cost saving is much higher. Hence, it may make sense to switch.

However, if the bank were to ask for the same fee of Rs 50,000 (for MCLR rate of 9.5%) for a loan of Rs 15 lacs, it wouldn’t make much sense. The saving is only Rs 1.99 lacs.

Planning to prepay your home loan?

You could have also used the switch fee amount to reduce outstanding loan amount. After all, part pre-payment will also result in lower interest outgo.

If you are planning to pre-pay your loan aggressively, you must reconsider your decision to switch even if mathematics in the previous section is favorable.

This is because, as your pre-pay the loan, the outstanding tenor goes down. As the loan tenor goes down, the benefit of switching to lower interest rate will also go down.

It is quite possible that you may be better off pre-paying the loan than paying fee to switch to MCLR.

For instance, for a loan of Rs 15 lacs for 20 years, you save 1.99 lacs by switching to MCLR at 9.5% p.a. If you had used Rs 50,000 to pre-pay the home loan, then you could have saved Rs 3.36 lacs over the loan term. Hence, in this specific, you are better off pre-paying loan.

And this is just for one prepayment.

So, if you have plans to pre-pay loans, include such pre-payments in your analysis.

Do note I have chosen numbers to suit my argument.

I do not mean the pre-payment is better than switching to MCLR.

All I am saying is that pre-payment is an aspect that you must consider and that regular prepayments will lower your switching benefits.

Note: Many readers have asked me in the comments section whether they should switch from Base rate to MCLR linked loan by paying a switch fee. Advise you to appreciate that, in the above analysis, I have made a few assumptions which are unlikely to hold true. For instance, it is unlikely that the interest rate differential (between MCLR and base rate linked loan) will remain constant across the loan tenor. Hence, any suggestion that I give in the comments section must be considered in this light.

Following section was added on February 26, 2017

MCLR will keep changing while the Spread is constant

Though this section should not be part of a generic post, after going through many of the comments in this post, I thought it apt to discuss this aspect. This aspect may be quite important in current scenario.

When you take a home loan, it is offered as a spread over a benchmark. That benchmark is currently MCLR. Earlier, it used to be base rate. For instance, if 1-year MCLR is 8.5% p.a. and the spread for your loan is 0.35%, you will get loan at 8.85% p.a. I assume home loans are linked to 1-year MCLR.

What you need to remember is that the benchmark keeps fluctuating while the spread usually remains constant during the loan tenor. Therefore, after 1 year, if the MCLR goes up to 9.0%, interest rate will go up to 9.35%.

Please understand home loan agreement can be structured in any way and may even leave scope change in spread. However, a few sample agreements that I have read, there was little scope for revision in spread. Even if there is provision for revision in spread, banks will be more forthcoming in revising it upwards rather than downwards. We know banks, don’t we?

Consider two scenarios.

MCLR of 8% and spread of 0.65%

MCLR of 8.4% and spread of 0.25%

In both cases, you will get loan at 8.65%. Which one will you opt for? Which is better?

Clearly, the one with the lower spread. Why?

In the first case, you are locking in a much higher spread.

Something similar happened recently when the MCLR was significantly cut by SBI while the spread was increased.

A took loan in December 2016 and got loan at 8.9%+0.25%= 9.15% p.a.

While if you took loan in January 2017, you would have got loan at 8% + 0.65% = 8.65% p.a.

You should be quite happy. You have saved 0.5% of interest.

However, the expression will change after a year. After one year, suppose 1-year MCLR is 8.5%.

A’s effective interest rate will be 8.75% p.a. (8.5% + 0.25%) while you will pay 9.15% (8.5% + 0.65%). Who will be smiling then?

Therefore, you will pay a higher interest for the entire loan tenure (even though you paid lower interest rate in the first year).

To be honest, this comparison is meaningless. Nobody has the gift of hindsight. Nobody knew that MCLR will be cut sharply in January and spread increased to make up for MCLR cut. Therefore, it is difficult to take action. You do not really have a choice in such cases.

However, now, many of us have a choice. Should you stick with base rate or switch to MCLR by paying a fee?

Even though I have discussed the question in detail in this post, I must reiterate that you consider this spread too while making your decision. My analysis just does not consider this aspect.

Another point to note is that spread in your base rate loan can be different from MCLR linked loan.

By the way, I do not, in any way, mean that you should not switch to MCLR just because the spread is high. A few readers have opined that existing base rate borrowers must stick to base rate so long as the spread is high.

I do not agree with such an opinion. Who tells you that this situation will not stay for a long time? For every day that you do not switch to MCLR, you keep paying higher interest rate. Higher interest payment means lower principal repayment in each EMI.

And you always have the option to change your lender (balance transfer) if you feel later that you are being short-changed by your lender.

But, do consider this aspect. And always remember there is no such thing as free lunch. And banks are the last ones to offer you a free lunch. Therefore, do not consider a switch to MCLR a win-win deal. It is never that simple.

The post was originally published on April 6, 2016 and has been updated since.

Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

Reader Interactions

Comments

Hi,The banks have already found a way of cheating in MCLR. The spread over MCLR is supposed to be based on the risk profile of each borrower. But the banks have simply applied the current spread they have on the base rate to the MCLR on all customers.Also the Operating expenses component on MCLR will be higher for govt banks like SBI than private banks like ICICI since they are efficiently managed.But the private banks wont lend any lower than govt banks, its always the SBI that announces MCLR first and then private banks follow.

So any reforms in India will not reach common man, its a pity in the so called democracy.

Dear Pradeep,I had mentioned they will figure out a way. Bankers are too smart to sit quitely.That’s the way it is, not just in India but everywhere.And it is not just banks. Everyone does that. Even common man like you and me.About spread, even spread on base rate is a measure of risk only. So, I am ok with that.SBI is the big boss. Whatever it does, everybody toes the line.However, MCLR is more transparent for sure. The new lending costs will be in line with new borrowing costs. They won’t to be to have it both ways. Or so I think 🙂

Hi Deepesh,How can spread be the same for all borrowers? Is it not directly violating the guidelines of RBI? I mean this way they can reduce MCLR to 9% in May and increase spread to 0.5% keeping the rate constant at 9.5%. How will RBI address this now?Also just checked SBI Maxgain loans have 0.35% as spread which makes the final rate as 9.55% same as the base rate+ spread last month.Will RBI just keep quiet seeing how this has panned out?

The worry for me is, when RBI increases rates to 8% in future, these people will take MCLR close to 11% because of the higher MCLR they have started with today. In the last 5 years the maximum base rate of SBI was 10% when Repo rate was 8% 2 years back. So effectively banks seem to be the only one to benefit out of this exercise. Well of course people like Mallya benefitted too…

Hi Pradeep,RBI does not issue any guidelines for deciding the spread. It is completely internal matter of the bank. It is just that determination of spread should be fair. A process should be followed and it should not be arbitrary.It can even be same for all borrowers. Btw, I am not saying it is same for all borrowers. All I am saying RBI does not regulate this.What you need to focus on is, Has SBI increased spread over MCLR just to bring it in line with older interest rate on offer?From what I have read, the rates for the new borrowers have come down (from 9.55% to 9.45% p.a.)Yes, MCLR is a double edged sword. There are no two ways about it. You can expect rate hikes to be passed to you much faster under MCLRregime.In my opinion, it is a good way forward. MCLR is much more transparent. However, I do expect banks to find a solution around this.Wait for sometime. Let’s watch the space for a few more months and then form an opinion.Please understand MCLR depends on borrowing costs too. Let the deposit rates come down. If MCLR does not come down even after cuts in deposit rates, then you can sense foul play. Think we should wait till such time.

I have Home loan with 220 lakh. Current iinterest rate is 110.40.bank is ready to reduce rate to 110.10 without any eextra cost.It will Shift loan from base rate to mclr. One thing rate will be fixed for 1 year.if I Shift to axis bank with only 1000 rs stamp duty they offering me loan at 9.10 so what to do.

I have a SBI maxgain OD home loan of 35L @9.46% started on Jan 2016. Is it advisable to switch to MCLR which the SBI is offering now @8.7% and charging around 0.5% fee of outstanding amount. Please advice!

I have taken a home loan from SBI Pune. I completed the documents formality on 27th Apr 2016 and disburse the amount on 2nd May 2016. I have taken Max gain Home loan. I have checked that the interest rate is decreased wef 1st May but is not passed on me.

I have checked with the branch Manager SBI, he is not cooperative and said if it would be applicable to old customer than it would be automatically passed on to you.

Please assist that what should I do in this case to get the benefit of lower interest rate?

Dear Manish,Reset period for SBI home loans is 6 months, I think.MCLR has interest reset period.If you took the loan in May, your loan interest rate will get revised only after 6 months.So, you will have to wait for 6 months atleast before your interest rate is revised.MCLR is applicable for all loans.In my opinion, you should have got loan at the new MCLR + spread.

I have taken SBI MaxGain Home loan on 23-Oct-2015. My interest rate is 9.5% based on Base rate. I want to know when my interest rate will change, as the interest rates are switched to new MCLR. So there is no any revision in Base rate since long time.

Dear Archan,When your base rate will change? SBI will decide.MCLR, due to its structure, will be revised much faster.Do note both interest rate cuts and interest rates hikes will be transferred faster under MCLR. So, MCLR is a double edged sword. Even with MCLR, you will have interest reset periods.At the moment, SBLR MCLR rate is not very low (compared to base rate). It is 9.35% for women and 9.4% for others. So, no serious difference.Banks may charge money for switching from base rate to MCLR.Have you checked this with bank?

Hi Deepesh, thanks for such a helpful tip. I have one question , I had taken SBI home loan in January 2015 and my home loan interest is being shown as 9.45% and its not decreasing can you help me how to know what is my Base point for the loan sanctioned and when the home loan interest will go down for my case ( non MCLR case ) ..

Dear Binay,Thanks!!!Base rate is same for all the customers of the bank.The difference is in the spread over the base rate.As I see, the base rate is 9.15% p.a. Your spread must be 0.3% (30 basis points)Only SBI can tell when they will reduce the base rate. A lot depends on external parameters too.

I want a small opinion from you. I am planning to get home loan from IDFC bank and they have a product of short & sweet home loan . They are offering me the interest rate of 9.65% wherein they say that their base rate is 9.5 % + .15 % margin on that.So my query is .15% margin good for us or its higher ? And also if there is any interest rate cut , will it decrease the base rate and margin would remain same ?

And regarding reset date what they say is ” In the event of change in base rate, the interest rate on your loan will be reset on a monthly basis. The reset date will be 1st day of every month for short and sweet accounts and EMI cycle date for other loans. ” So can u pls explain whehther this monthly reset date is good or no.

Dear Mehul,Loans are typically offered at a base rate + spread or (MCLR + spread).Base rate (or MCLR) is typically common for all borrowers. Spread varies across borrowers.It is reflective of your repayment ability. So, if you have higher loan repayment ability, the spread will be lower.Since April 1, 2016, all floating rate loans (including home loans) are being offered at MCRL + spread.Home loans at IDFC are linked to 1-year MCLR. 1-year MCLR is 9.5% p.a.0.15% is fine. It is the bank policy. So no extra charge for you.http://www.idfcbank.com/personal-banking/home-journey/home-loan/short-and-sweet-home-loan/pricing.htmlIt offers two types of loans.1. Regular2. Short & sweet facility: Rate is higher in this loan. However, it is like SBI maxgain loan where you can part surplus funds in your loan account to save on interest.With home loans, you always have facility to prepay loan without penalty. Would suggest you go for regular loan (and not short & sweet faciity). It is 9.65% vs 9.9%. You are paying 0.25% more in short & sweet plan. The difference is too big.Since the loan is on 1-year MCLR, your loan interest rate will be reset only after 1 year (and not every month) even though MCLR can be revised every month.When don’t you try with other banks? You might get cheaper rates.

The interest rate of short & sweet facility is 9.65% as what they have told me, though website would be mentioning 9.9%.And with the provision of surplus funds being able to park in current account , we can also withdraw the amount as and when required without any charges.

I wanted to understand if the MCLR can be revised every month , why the interest reset period is of 1 year.

I understand. In my opinion, 25 bps (0.25%) is too much price to pay for this facility.With home loans, you always have an option to make a part prepayment.About reset, don’t know the reason myself. But that’s the way it is.

I have taken home loan from ICICI bank of 33 lac on 31/7/2015 @ 9.90 interest rate. Currently my home loan interest rate is 9.55 and my remaining home loan is around 30 lac. I have inquired to switch over to MCLR scheme with interest rate @ 9.45. The manager told me to pay 18,000/- rupees with deduction of 3 EMIs. Please guide me 1) Is it worth to switch over to MCLR or continue with current base rate ? 2) Is it right time to switch over or still I have to wait till what time?

Hi Hiren,The difference is not too much (9.45% vs 9.55%). Just 10 basis points.The comparison is Rs 18,000 vs saving 3 EMIs.Once you discount the cashflows, the difference will not be as much. If you work out the maths, you can find out.What is your EMI, outstanding loan amount and loan tenor? You can compare two scenarios.1. Prepayment of loan by 18K2. Conversion to MCLR by paying 18KWhen do you finish loan earlier? I can’t do in absence of info mentioned above. Choose the option where you finish earlier.If you do not want to go through all this, simply switch to MCLR. It is clearly more transparent than base rate.

Firstly, let me thank you for your amazing insights on this topic. I myself a banker by profession and this is one of the few blogs I have loved to read till end.

I infer from this blog that you would suggest to switch over to MCLR at a given chance because of it’s transparency and I share this feeling with you. Also, banks are obliged to pass on the revised rates on the reset dates which is sure to happen unlike with Base Rate.

I would pounce on the offer like Vishal has got. Unfortunately, I am in Hiren’s boat. I have not yet approached ICIC for their offer for the change over, but If I wish to move my 33 lacs loan currently at 9.45 with EMI 32,415 and a tenor of around 16 years (run down of 20 yrs coz of rate cut) and of no intention to pre-close because of the tax rebate I am enjoying. Would love to have your suggestion on this.

Hi Prasad,You are welcome. Appreciate your kind words.You are already at 9.45%.Think even MCLR rate is 9.45% p.a. only. Hence, no need to switch by paying a fee.See, at the end of it, it is a spreadsheet analysis.Everything else being equal, I will prefer MCLR over base rate.First find out the cost of switching. Only then, an informed decision is possible.

Thanks for the detailed explanation on MCLR. However one i thing was not clear. If my loan is based on MCLR @ 6 Months does that mean even after the rate change i have to wait for 6 months for the rate change to come into effect ?

Also i need a suggestion on my current home loan. I have an outstanding loan of 16 Lakhs with Corporation Bank at 9.65% and i want to go for an top up of 3 Lakhs for which Corporation bank is charging 10.05%. However ICICI is offering HL at 9.45% (9.15% MCLR rate + 0.3% Spread) and Top up at 9.55%. Pending tenure is 170 Months.

If i do the calculation i am definitely saving Rs 35000 over the entire tenure (with an assumption of same interest rates all through) if i move to ICICI.

However i am bit confused if i should go switch from Government bank to a private bank as i feel if at all there is any default the private banks make you pay heavily. Please suggest.

Hi Girish,You are welcome. Interest rate reset will be done a 6-month or 1-year intervals as applicable.So, you don’t have to necessarily wait for 6 months. You merely need to wait till the next interest reset date.Go through ICICI Bank letter of amendment for home loans. You will get an idea.http://www.icicibank.com/managed-assets/docs/personal/loans/letter_of_amendment.pdfAbout your query, do consider the ancillary charges too. Do not just focus on interest rates.Nobody can comment about how interest rates for corporation bank and ICICI Bank will shape up. No point breaking head over it.Don’t default. If you think you might default, avoid taking a loan. Seek assistance from friends/family if borrowing is unavoidable.

Hi Deepesh, I am planning to take top up home loan of 10 lacs @ 9.55%, SBI. And then I ll use this amount to open saving account in post office on my father’s name (Sr citizen and his annual income is nil) and then we ll get interest rate of 8.6%. Loss of 1% can be cover because I ll get tax benefit on interest part. After 8-9 yrs the money will be mine. Is their any catch in this plan?

Sir,I have been given the same offer by IDBI. 9.45% (MCLR (9.30%)+0.15%) against existing of (base)9.75%. But when I took the loan I was given a rate of 9.75% at the same rate of base rate with zero spread. BUt now when shifting to MCLR they are asking for .15% spread. Is this procedure correct sir?

Ok. You are saving 0.3% by shifting to MCLR, which I think is huge.I don’t know how you got loan at base rate but there is nothing fishy if the bank is offering you MCLR + Spread. That’s how it works.So, relax.You can compare the switching cost with the number of EMIs you are saving by switching.That will help you make the decision.

I have 7 year OLD Home loan in SBI (Maxgain Loan)Current interest interest rate is 9.3 + .25 = 9.55%New scheme offers 9.45% with switch charges of 10,000Based on your blog I think its not wise to switch as of now. Am I Correct?Also since its a Max gain I am using Overdraft facility to good affect.I am paying less interest (due to overdraft facility) compared to provisional calculation done by bank in beginning of financial year.However as per Income Tax Act, Tax exemption on Home Loan interest is based on provisional calculation done by bank and not based on Actual interest paid.Am I correct? Is there any catch in it?

Hi Nath,What is the remaining loan tenor?About benefit under Section 24, tax benefit is based on interest rate payable (this is more concerned with the timing of payment and not the quantum pf payment). Slightly tricky for me in case of SBI Maxgain. In my opinion, it should be actual interest paid for Maxgain loan. You can’t take tax benefit for the interest you have not paid.What does your interest statement show?Suggest you talk to a CA in this regard.

Thanks for quick reply.My remaining Loan tenor is 13 years but I will be closing loan in maximum next 4 to 5 years.With regards to tax benefit on Max Gain scheme I shall consult my CA thanks.JFI There is slight difference between provisional interest certificate from bank and actual interest certificate (provisional is more than actual due to usage of overdraft facility)

Interest on borrowed capital:-Where the property has been acquired, constructed,repaired, renewed or reconstructed with borrowed capital, the amount of any interestpayable on such capital is allowed as a deduction.The amount of interest payable yearly should be calculated separately and claimed as a deduction every year.It is immaterial whether the interest has been actually paid or not paidduring the year.

I forgot to ask your outstanding principal.In any case, if you are planning to prepay in 4-5 years, don’t go through the hassles.The difference is 10 bps only at the moment.You may be better off deposit this Rs 10,000 (and service tax) in your Maxgain account.

Hi, Deepesh, your blog was extraordinary and very helpful for unfortunate guys like Mr. My question- My sbi home loan was sanctioned on 25-03-2016. No demand raised by builder till 12-09-2016. On 14-09-2016, I deposited the first demand at bank and found out that my loan is under base rate with interest of 9.5%. Mclr plus spread is 9.3% but need to pay .59% plus service tax.pls tell me if this .59% is on total loan amount of 28 lakha or only on first demand amount? Also is there prepayment charges under Mclr?

Dear sir,I am holding Home Loan in fixed rate 10.1% in LICHFL but from this month it is floating and it is shown as 11.1% but in online and even in the branch they informed that it will be around 9.4% for new and around 9.9% for existing.I want to know what to do whether to continue in same LICHFL or change the bank.SBI people saying that they will give at 9.35% and HDFC people says they will give at 9.4%.Really is it possible or they will make any other charges later.please suggest.

Dear Srinivas,Clarify the rate with LIC branch.There is big difference between 11.1% and 9.9%.Yes, there will be ancillary charges by SBI and HDFC.Are you sure you will get the finest rates from SBI and HDFC? When you apply, they may offer you a higher spread.Hence, it is not easy to say.You must compare the all-in cost and not just the interest. Ask them to provide information about all the charges.Even after receiving all the info, you need to see if the effort is worth. If the amount outstanding is not high or the remaining loan tenor is short, you can do without switching loan.

thank you deepesh for your clarification.Today Once again I spoke with SBI they says it is 9.4 only and the charges will be arround Rs18000.Secondly the out standing is around 24 lakhs and tenure approximately around 11 years.so can you clarify now what to do.

thank a lot for such a insightful article. I just have a simple question,– i have taken 40 lakh loan from SBI @ 9.7% per– it for 20 years– they are asking 23k to switch from 9.7 to 9.3 (.58% of total loan)Question is , is it worth investing 23k one time to reduce interest rate?My remaining loan amount is 22 lakhs.

There is a case which is not covered above. Could you please help ?My existing loan from ICICI is at 9.40% (9.30% base or 0.10% spread) and at no cost i can switch to MCLR at 9.40% (9.05% MCLR + 0.35% spread)Since MCLR inception, ICICI has reduced MCLR thrice by 0.05% each, effectively 0.15% and base has been reduced only once by 0.05%My understanding is that ICICI has no incentive to reduce base compared to MCLR reduction because base rate doesn’t affect its interest rate for new customers.However as we have seen in another article of yours http://www.personalfinanceplan.in/opinion/banks-may-not-be-passing-mclr-cuts-to-new-home-loan-borrowers , banks keep on tinkering with spread and we have seen in past in base regime, to reduce new loans interest rate, spread was decreased and base kept same when rates were decreasing and this is bound to happen in MCLR too.

What is your take for such cases where one simply switches from base to MCLR without change in interest rate?

Only positive point was that i think MCLR will get more reductions than base, effectively giving me a lower rate after next reset period.But as you said banks are quite smart, another thing that they can do is keep MCLR constant and reduce the spread later on

Thanks Deepesh. I will stay put with Base for now.I didn’t mean that they can change spread for existing loans, but putting in a better way…“But as you said banks are quite smart, another thing that they can do when the RBI reduces repo rate, is to keep MCLR constant and reduce the spread for new loan offerings later on, effectively reducing interest rate for new customers, and keeping old customers at higher rate”

Hi,first i thank you for your informative article. i need your help on my issue. the issue is My Brother took a Home loan of Rs.2300000/- from ICICI home loan in 2006 at Floating interest. we paid nearly 12o months. now they claim again we have to pay more than 120 months. when i ask them about this they simply said based on the monthly floating rate of interest they change the EMI and tenure of the loan. i am not able to understand and not known that on what basis they fix rate of interest in case of floating interest? how can i find the FRR of ICICI from 2006 onwards? i am expecting your informations on this aspect. thanks.

Dear Sunil,Typically, when the interest rates go up, banks increase the tenor instead of increasing the EMI.On the other hand, when the interest rates go down, banks typically decrease the tenor instead of decreasing the EMI.What was the original loan tenor?

Your calculations above were of help. I am in a dilemma and will need some advice. I have a home kon at basic rate. My loan amount pending is 12.61 lakhs with a tenure of 53 months at interest rate of 10.15%. I was informed about the MCLR today by the bank and they mentioned that I could move my plan to MCLR at a fee of Rs1451 with an interest rate of 9.45%. After movement the bank claims my tenure will drop to 51 months if I do not wish to change my EMI (changing tenure is my preference).Considering the timelines and the period what would you suggest I should do? Again I m not going to be very aggressive at pre payments, I may pay 20% of the current outstanding once in the remaining period.Appreciate your views

I have taken home loan from IDBI bank at base rate 10.25.My outstanding loan amount is Rs. 166000 and remaining tenure is 13 years. Now the base rate is 9.65 and mclr rate is 9.3. I enquired wuth bank to switch over from base rate to mclr. They told me that I have to pay .1% and serv tax of outstanding amount which is about rs. 2000. Can I switch to mclr from base rate. Mclr reset period is 1 year. Whether my mclr will change or not if there is any change in mclr with in 1 year. Thanks in advance

I have a SBI Maxgain HL taken in Oct 13- Rs 24 Lac. The current ROI is 9.6% [Base rate + 0.3%] and I pay EMI of Rs 22k.I checked with my bank and they have asked for switch-over fees of Rs. 12k for current MCLR linked rate.Need your suggestion on the same- should I switch.

I am having Housing loan with SBI. I took it in 2012 along with the Home loan insurance and currently it’s on 9.55% interest rate. I have placed a request for MCLR conversion in June 2016 after the RBI announcement of MLCR rates from 1st April 2016. Then SBI manager told that they have some software issues in converting my loan to MLCR. They are facing only software issues only with the loans which are having the insurance. I have been chasing them for the conversion but still it’s not converted to MLCR rate. I have even reported the same to RBI Banking Ombudsman. Then SBI reported the same software issue to the RBI also. Due to the software issue at SBI and due to the inability in fixing the software issue I have been paying the extra interest (i.e. as per the Base Rate 9.55%). Also there is no expected time lines when the software issues will be fixed in SBI. Could you please let me know to proceed in this scenario.

#1. From the last 7 months. This software issue is existing right from the beginning of the MCLR conversion effective date (1st April 2016). SBI implemented MCLR from the 1st MAY 2016 on wards. In 2012, SBI offered a Home loan insurance with a product name called “Surakha” Insurance and I opted for the same while taking my housing loan. So all the old home loan accounts (i.e. taken prior to 2012 or 2011 ) which are having the “Surakha” home loan insurance from SBI are impacted due to this software issue with the SBI.

#2. I have a written complaint with SBI and SBI also replied in writing that they are unable to fix the software issue at this point of time. Its been more than 6 months and I have been following with them and they are mentioning that they are working on fixing the issue with their software vendor TCS. But in todays modern world a software issue is taking more than 6 months to fix with the a leading bank like SBI along with their software vendors.

#3. The following is the RBI Banking Ombudsman response to my complaint. It’s also in written format to my complaint.

a) The matter was referred to RACPC who has expressed regret and confirmed that the request for MCLR cannot be acceded to as the functionality of software is not supporting for the conversion of loan account at present.b) Further, it’s been advised by RACPC vide mail dated July 25, 2016 about the inability for interest rate conversion at present,c) It’s advised by the bank to keep in touch with RACPC for conversion when functionality will be available.

Also recently RBI again reduced the base rates, but banks are not doing any changes to the existing home loans which are on Base rate. Banks are focussing only on the MCLR only. So customers who on legacy Base rate are still has to pay the old rate only. Also customers like me, when I opted for the MLCR conversion, SBI is unable to do the conversion even after 6 months due to the existing software issue.

But there is one to give me a guaranty in written format that,my MCLR conversion request will be considered from the initial request date and interest/principle adjustments will be done manually or automatically by software to my loan account, when the software issue is fixed in future before my loan is closed or before the loan expiry of the loan term or whichever is earlier.

I am thinking of legal help, but it’s a time consuming process.

Could you please advice me if there any other way or if legal is the only option left, then the procedure for the same.

Hmmm. Reply from ombudsman is quite surprising. Completely siding with the bank.To be honest, I don’t know who to approach.Can’t you cancel the insurance plan and switch subsequently? Don’t ignore the coverage though.Why don’t you write about your story to Moneylife?

Insurance plan cancellation may be a solution but bank personnel is unable to give the 100% garantee up front thhat it will be converted to MCLR after that. Even if that fails, then I may be the victim of two (i.e. software issue and cancel of insurance coverage). Also cancellation of insurance removes the coverage.

Dear Prahlad,Yes, banks should change base rates too. However, base rate calculation methodology is quite different and greater leeway to banks.Banks never forget to make money. The banks will deliberately ignore you but will never forget you.Btw, about asking borrowers to shift base rate to MCLR, I think this is the logical way forward.

Really good number of articles i could found here. Thanks for your valuable guidance in personal planning. I have two queries.1. I have a home loan(27L remaining principle) in Bank of India with ROI 9.35%(MCLR)+0.30%(Spread) = 9.65%(in base rate). But currently the bank is offering home loan with ROI 9.35. I have requested to avail that. After long chase, they have accepted and offer to change my loan to base rate to MCLR with 9.35 and there is no charge for switching. Shall i go with that?2. Or i have another plan like takeover to SBI. Now SBI is giving loans under festival offers with ROI 9.15%, that is without processing fees. But any way i need to pay other costs like MOD, legal and other charges.Should go with MCLR conversion with 9.35% or switch to SBI?Please guide me on this.

Thanks Ragu!!!Please do share the posts you like on your social media pages.1. If there is no cost involved, it makes sense to switch to a lower rate.2. About festive offer from SBI, does the rate of interest change after a few months or years?Find out about exact costs involved.Subsequently, you can make a decision.Unless the costs are quite high or SBI rate is a teaser rate, 9.15% is far better than 9.35% p.a.

Thanks for your quick response Deepesh. I am not sure about the SBI rate is teaser or not. The cost involved in the takeover would be around at least 25K. Still i shall go ahead with takeover or keep in same bank with 9.35% Please advice. i am quite confused now.

I am not able to reach the bank due to note denomination changes. Could you please tell me, what is teaser loan? what is the difference between the normal one. Can you please give me some more insight on that?

Hello Deepesh,First of all let me thank you for all your insights which helps a ton for informed decisions.I wanted to go for a home improvement loan, although, I require it for personal use. The rational being it’ll be cheap and it’ll carry IT rebates against a personal loan.I am serving my home loan from ICICI Bank and so availing the requirement from there itself. Now, I have come across 2 different products from ICICI which is catering this need. 1) Home Improvement Loan (https://www.icicibank.com/Personal-Banking/loans/home-loan/home-improvement-loan/index.page) and the other 2) Personal Loan linked to Home Loan (https://www.icicibank.com/Personal-Banking/loans/home-loan/home-loan-top-up/index.page)I am not sure which will solve my purpose, since the wordings ‘Personal Loan’ in the product 2) makes me skeptical of it being eligible for the IT rebates I am looking for.Anxious to hear you take on this.

I had a Q – I had taken loan from Axis bank in 2009 & it is on PLR mode currently being charged @11.35%. when complained about quality of service, loan retention dept offered me to changed to MCLR. Pending Principal amt is around 11 Lacs and tenure wd be around approx 110 months. they are offering me 9.20% w 6 month MCLR @ swich fees of 5000+tax= 5750. Can you pls suggest how to go ahead in this..

I also need to know wont the BPLR/PLR customers atumatiacally move to MCLR without any switch fees ?

Hello DeepeshI referred RBI cicrcular in this ragrds.. for switch from PLR to MCLR, I found following

11. Transition to MCLR from Base Rate/ BPLR(a) Banks shall continue to review and publish Base Rate as hitherto.(b) Existing loans and credit limits linked to the Base Rate/ BPLR shall continue till repayment or renewal, as the case may be.Provided that existing borrowers shall have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.Provided that the switch-over shall not be treated as a foreclosure of existing facility.

My Q is – what is meaning of last sentence ‘Provided that the switch-over shall not be treated as a foreclosure of existing facility.’ –> does it guide/allow/restrict bank to charge switch fees for changeover from PLR to MCLR.

I have outstanding loan balance of 25.71 lakhs with LIC finance on 10.2 ROI , Am planning to move to ICICI as they are offering 9.2% in which rate is I-MCLR-1Y + 0.25%They are charging 11500 as processing feee will I get enough benefits to move on.

LIC gave me a option to reduce to 9.85 from 10.2% by paying 1150 rs to them,Should I move to ICICI or stay in LIC will this MCLR benefit me.

Hi Prashant,The comparison is between 9.2% + Rs 11.5K and 9.85% + Rs 1,150. There is no information about tenor.You will have to work out the numbers as shown in the post.I have not worked out the exact numbers. Given the loan amount, I feel ICICI offer might just turn out to be better (atleast mathematically)

I got my loan sanctioned in April 2016, from SBI- WOMAN MAXGAIN -20 lakh- 240 Months -9.45%, NOW i ask bank to convert it to MCLR, they are saying they have no order from RBI to convert base rate to MCLR( orally when i visited branch ) before that i sent 2 emails but no answers, then i launched ONLINE complain, they closed it by comment : “Interest rate is being examined of the customer, customer advised ” how ever they are not ready to answer my emails giving me any circular etc.I am planning to visit RACPAC BRANCH OF SBI , EVEN SENT the email at higher level officer so my question :1) I sent emails no answer but saying orally as “they have no order from RBI to convert base rate to MCLR for existing consumers ” something is fishy ?2) when i contact to call center they say pay 0.5% of outstanding but not more that 5000 + service tax to bank to convert to MCLR so should i pay it my remaining amount is 19 L and tenure 230 months.3) home branch is saying wait for sometime rate will be reduced further and will be given benefit to u should i wait ( as effect of demonetization SBI chief Arundhati Mukharji said I -rate will be more go down )

I have taken loan of rs 1520000 from HDFC ltd with 9.4% ROI from 12th May 2016.After 6 months when all interest rate changes they are not changing in my home loan. And as per RBI guidelines loan taken after 31st march its rates should be calculated based on MCLR but they are saying it is calculted on base rate.

When i visited branch they are asking me to change my rate of interest Manually.

Can’t they do it automatically when my ROI is on floating based. HDFC is doing change rate of interest every quaterly but they have not change rate of interest on my loan inspite of decreases of interest all over.

I have a outstanding housing loan amount for Rs. 450000 from State Bank of Bikanar and Jaipur. Now, bank is offering to swtich from base rate to MCLR rates on a charge of 0.50 % of outstanding amount and + service tax. I am planning to repay the whole amount within 3-4 years, should I opt for MCLR or go continue with rate>one more thing is, is MCLR applicable after 1 year to all existing loan even after one dose not give his consent? pls sir clear this.

Dear Anand,As explained in the post, decision depends on interest rate differential, loan tenor, switch fee cost and your exact plan of prepayment.Considering that you plan to prepay, you can continue with base rate.

Hi Deepesh,Thanks for this forum, which is answering many of our questions related to HL.I availed SBI Maxgain HL in Jan 2015 @ interest rate of Base Rate + 0.05%. Thereafter, whenever there was any change in the Base Rate, that was passed on to me. However, after introduction of the MCLR system, the change never happened in the Base Rate and it has become like a fixed interest even after reduction occurred so many times in MCLR.In this context my question is, whether the bank will change the interest rate if there is any reduction or hike the same if there is any increase in future?Since they are not passing on the reduction to the existing customers, they should not increase the same also, I feel. Please through some light on this matter, which will benefit the existing Base Rate customers to a considerable extent.

Dear Prabhu,Calculation methodology for base rate and MCLR is different.Base rate is based on average cost of funds while MCLR is based on incremental cost of funds.Hence, movement in MCLR and base rate may not be in tandem.MCLR will reflect prevailing interest rate much faster.

Banks are always keen to pass on interest rate hikes. Not the other way round.But yes, you can expect interest hike transmission to slower in case of base rate.

I have taken a power home loan 20Lacs in Axis bank in April 2016 at base rate currently base rate is 9.35% , where as current MCLR rate is 9.15%.Please suggest shall I switch over to MCLR.is there advantage ?

Also I do part payment , please suggest shall opt for reducing EMI rate or reducing Tenure .Thanks

Dear Suresh,You got base rate linked loan in April 2016? Surprising if that’s the case.The information is not enough for me to make a decision.Suggest you go through the steps mentioned in the post to figure out.Btw, difference of 0.2% is not too high.

Dear Suresh,Please work out the calculations. Will depend on loan tenure too.In my opinion, difference is not very high (9.15% vs 9.35%).Plus, you are locked in the same rate for atleast 6 months or 1 year.

Hi, I had availed home loan from IOB in 2006 at BPLR rates. Later all customers were informed to shift to base rate. But we never recd any communication and bank is still charging us at high rates 11.5% for home loan. How to rectify for current and past years also

Hi Deepesh, i have taken Home loan from HDFC in 2012, i have revised the rate of interest in Jan-2016 by paying 10K. can i convert my Home loan to MCLR, fees which i am going to pay is one time to change rate of interest and to link my home loan with MCLR. Otherwise every year i need to pay fees to HDFC to convert the rate. Currently every year i am paying nearly 10k to change the current rate of interest.Please provide your advice

Hello Deepesh,Hot topic… Awesome simplified and detailed at the same time which was so confusing for me earlier.My icici home loan started at 31 lakhs at 9.85% now currently it’s 30 lakhs at 9.45% (9.3+0.15)207 months pending, I have an offer of mclr 9.1% (8.9+0.2) but at a charge of 0.5% of principal outstanding plus service tax which approx is 18000.I won’t go into pre payment.Should I jump over?Waiting for your wise opinion.

Dear Virendra,You will save about 15 EMIs if you make the switch. But those EMI savings will towards end of the loan tenor while your outgo is upfront.However, even after applying discounting, switching looks like a good mathematical choice.Please understand there are many assumptions built into this analysis (as mentioned in this post).

my wife has taken home loan from sbi .my pending amount is 1500000 with interest rate 9.5%.today sbi has decreased intrest rates by 0.9%. will imy wife will get the benefit.loan was taken on jjan2016 but sanctioned on oct 2015. please reply sir

I have taken SBI MaxGain(SBI SURAKSHIT hl maxGN OCT13) Home loan on 23-02-2016. My interest rate is 9.45% based on Base rate(current interest rate). I want to know when my interest rate will change, as the interest rates are switched to new MCLR. So there is no any revision in Base rate.

In this regard, should we switch to lower MCLR as now MCLR is 8%.Should in switch to term loan from Maxgain.(as MCLR is applicable to both loans and its floating).

Hi Anubhav,Banks won’t automatically switch your loan to MCLR.So, you have to check with them the switching cost involved.Big difference between 9.45% and 8% p.a. especially if the loan amount is quite high.

SBI website is showing 8.8% for max gain with 8% MCLR.Bank is charging for 0.57% of the loan sanctioned, which is 31 Lakh. Now should i shift to MCLR and switch to term loan from Maxgain.(as MCLR is applicable to both loans and its floating).

Hello Deepesh, I have taken a home loan of 2000000 from SBI(Maxgain) in Oct 2015. The loan rate till 31/12/2016 was 9.55%. They changed it to 9.50 % on 2/1/2017. I want to complete the loan within next six years. i have already made upfront payment of 400000 till date. The remaining principal is approximately 1420000. Shall i switch to the new MCLR rate or keep the existing rate of interest. Please help.

I have SBI Maxgain HL of 36L under base rate mechanism. Currently it is @9.45% post 1st Jan 2017 change. Till now bank has disbursed 18L. I have two questions:1)Will it be beneficial to swith to MCLR which is 8.6% currently.2) What is the SBI switching fees, and it will be applicable on what amount. Whether at full 36L or balance 18L

Shobhit,You need to look at multiple aspects including loan tenor and switch fee. Difficult to comment in absence of such info.Additionally note SBI has increased the spread to 0.65% from 0.25%. In the coming years, MCLR will go up and down but the spread will remain constant.1. Depends on additional information.2. Please check with SBI. There is no RBI guideline on the same.

I have taken 20.6 lacs home loan in Axis bank in Arpil 2015 , current loan balance is 1840000/- and balance tenure is 131months ( Original 152months–20months paid)@ Rs 22376 per month(EMI).Current base rate is 9.35%. Please clarify the below points1) Shall I switch over to base rate 9.35% to MCLR 9.0%2) If I pay part payment about 3 Lacs ,which is the better option to choose reducing tenure or EMI ( current EMI 22376/-)3) Is there any option to change the bank as SBI is giving customers lower interest rate 8.65%

Hi DeepeshI took home loan of 20 lakhs in 2013 at floating rate of interest which now stand at 9.5% after revision which took place yesterday.Please advise should I switch to new mode by paying conversion charge.

SBI has recently announced a sharp cut in home loan rates and the 1 year MCLR now stands at 8%. However there is a sharp increase in the spread as well such that a maxgain loan under 75 lacs is now priced at a steep 0.8% premium to the 1 year MCLR (effective rate of 8.8%)

I have a 24 year maxgain loan (~58.6 lacs outstanding) taken in April 2015 at base rate + 0.05% spread (current effective rate of 9.3%). I now have the option of switching to MCLR at no cost as long as I retain the original 0.05% spread over and above the current MCLR+spread. Now the dilemma is whether to switch to MCLR now and get a 0.45% lower effective rate for the time being but get locked into a much higher overall spread. I have a feeling that this switch will hurt me in the long term when rates start to rise as the spread will always stay constant. Also the base rate too will drop eventually though maybe not to the extent of drop in MCLR.

Hi PD,I agree. This high spread can be tricky. By switching now, you will get locked in a very high spread.However, at this moment, you loan outstanding is high. Hence, there is significant saving by switching to a lower rate. And you can expect base rate borrowers to continue getting unfavourable treatment.The point is how long will you wait?Hence, may not be a bad idea switching now.

Presently, I have a home loan of 34 lacs for 22 years from Corporation Bank which I intend to switch over to SBI.

I have below queries for my home loan.

Is there any fee charged by SBI for switching of home loan form SBI Max Gain to Regular Term Loan and vice versa?

As stated above I have a home loan of 34 lacs for 22 years. I can not pre pay any amount for next 3 years. But thereafter I may gradually start prepaying home loan. Hope to fully pre pay loan withing next 15 years instead of 22 years.

I should opt for SBI Max Gain or SBI Regular Term loan for my home loan?

I am having an home loan with axis bank with current base rate at 9.35% and axis bank is giving mclr at 8.85%. The bank is charging 10,000 plus service tax for shifting to mclr . Would you suggest shifting to mclr us this conditions.

I have taken 38 Lakhs ( Tenure 20 years) as home Loan from PNB in April 2016( though it is approved in March 2016), I am not sure if it is MCLR or Base Rate . I have been charged with 9.45 %. Still it has same rate. Do you advise me to switch to MCLR now? and what will be the probable charges which I have to pay upfront?Thanks in Advance

Thanks Sudhir.Please understand my analysis has limitations.On the face of it, it looks like a good decision (to switch to MCLR).Do note you will be locking in a high spread.Yes, it is possible that MCLR can be higher than base rate. May happen when the rates are increasing. However, banks are reluctant to pass on interest rate cut, not so much with interest rate hikes

Firth, very nice blog and information sharing. I had a home loan of 13 lakhs from HDFC, present interest rate is 10.30 (since last Jan). I had callupon to HDFC about not reduce of rate. Whereas i have been inform that the rates change by BRI is on PLR and it will not effect to my loan. When i asked to switch over to MCLR they said no….your kind opinion will guide me to switich over my loan to other bank or ? please.

I have taken a loan in June 2016 on MCLR 9.2% PLUS .2% spread. Now they have reduced the MCLR to 8.2% plus spread .45%. My question is, can the bank increase the spread from .2 to .45 for the existing borrowers on MCLR? If yes, is there a risk now by asking the bank to re-adjust the MCLR?

Banks are unlikely to change spread.However, technically, there is provision to let them change spread.Yes, you might get locked at a higher spread.Bank branch officials will mostly be clueless about it.You can mark an e-mail to SBI Chairman. You might just get an answer.

I have taken 20.6 lacs home loan in Axis bank in Arpil 2015 , current loan balance is 1840000/- and balance tenure is 131months ( Original 152months–20months paid)@ Rs 22376 per month(EMI).Current base rate is 9.35%. Please clarify the below points

1) If I pay part payment about 3 Lacs ,which is the better option to choose reducing tenure or EMI ( current EMI 22376/-)

3) Is there any option to change the bank as SBI is giving customers lower interest rate 8.65%

Dear Suresh,1. Think it is a personal preference. I prefer reducing the tenor. Unless cash flows are stretched, go with reduction in tenor.2. Yes, you can take a home loan transfer (unless your loan agreement prohibits you in prepaying loan too soon). Check your home loan agreement for the same. If the agreement permits, contact nearest SBI branch.

Home Loan availed from Bank of Baroda. Current loan outstanding is Rs.6.88 lakh the tenure outstanding is 69 months approx. Present EMI is Rs 13080. Current base Rate is 9.60% while the MCLR from 07.01.2017 is 8.65% for 5 year tenure.Is it advisable to switch to MCLR. Please advice.

My name is shyamsunder and I have taken a Home loan from SBI in Oct. 2016 with 9.25% Interest rate.

Now in Jan 2017 SBI’s Loan rates are 8.6% for women and I have asked my branch manager to suggest if I should convert it with new Interest rates as my wife is also a Co- applicant in the loan application, so she said me that my interest rates will automatically will get converted to the lower one after one year.

Yes Shyamsunder. Since you are on MCLR, your home loan rate will automatically come down in October 2017 (or rather your MCLR will automatically change in October 2017). Your loan interest rate will be Prevailing MCLR (in October 2017) + spread.

Dear Deepesh.I Have taken a take over loan for 20 years for Rs.21,50,000 from SBI on 30th Sep 2015 with Int. rate 9.35%. I have prepaid then and there and now My loan outstanding balance is 17,57,000. Few Days ago, the SBI reset the Int.rate to 9.30% for my loan. And I came to know that the SBI brings MCLR+spread to 8.65% with effect from 01.01.2017. It says the MCLR+spread is for one year and the existing customers can switch over to current MCLR by paying the fees 0.50% + service tax on Outstanding Balance.Shall I convert the Int.rate from Base rate to MCLR?

Hi Deepesh,please help me out.i have take SBI (maxgain) home loan FOR 3814000/- @ 10.15% for period of 25 year and paying EMI Rs 34928/- on since june 2013.now at present day loan acc shows balance loan amount Rs.3734000/- current interest rate is 9.35% (wife is first applicant).SBI says switch over fees to MCLR is 0.58% of loan amount.can you elaborate how will it benefit me if i opt for MCLR.hope info is sufficient for you if you required any i will provide you. for me its difficult to understand terminology used in calculations.awating for your response.regards,P. Yogesh

Dear Yogesh,For elaborate explanation, you will have to work out the numbers yourself.As I understand, your outstanding term will be ~230 months (at current rate and emi).At revised rate of 8.65%, you loan will finish in 205 emi.Significant savings for a cost of Rs 18,000 upfront.Think you can switch.However, do appreciate the limitations of my analysis (as provided in last para of the post)

Dear Ronak,Thanks Ronak. Do share the post with your friends.You will get benefit of lower MCLR from October 2017. Suggest you wait till that time.You have already locked in a lower spread. As I understand, banks cannot change spread so easily.In my opinion, it is not worth shifting to another bank.The problem you have facing at SBI , you will face at another bank too.MCLR has reset period and it is there with all the banks. Other banks may have a lower reset period though.

my question is, if I switch to MCLR will the .58% calculated on Book Balance or Drawing power.Also,I am planning to pay off my loan in 5years.Should I keep mt existing loan interest rate or switch to MCLR?Please let me know

I have taken sbi maxgain home loan of Rs. 20,40,000 in Oct. 2013. At that time the rate of interest is 10.10. At present the balance amount is 1700000. The rate of interest on 31st Dec. 2016 is 9.55. But on 2nd Jan sbi send the message the rate of interest is 9.50 But in all the news the rate of interest is reduce by.9 But my rate of intrest is recued only by 0.05 The what is process to make my rate of interest with the current rate, I want to complete the all the balance loan in next 7 years. Plz guide

Dear Vaibhav,If you do analysis as per my calculations, switch will be a good choice.However, do appreciate the limitations of my analysis.The timing and quantum of prepayment will also be crucial. I have not considered that.

Hi, I took a home loan from Union Bank of India at 10.25 percent in the year 2014, for 21 years and EMI payable as 19374. During the course of these two years, the interest rate has come down to 9.55%. I have managed to prepay the loan and now the outstanding is 15 lacks. I spoke to the bank manager to reduce the tenure but he said that there is no need to reduce the tenure as the interest rate paid is dependent on the outstanding balance and is not affected by the tenure. What he meant was that whether the tenure is 21 years or 15 years, it doesn’t matter as I pay the interest on the outstanding balance. It doesn’t seem right to me. The second question is that the bank manager didn’t talk about any fee and he just said something about stamp papers to convert it into mclr.

Question 1: Is the bank manager correct in saying that I shouldn’t be bothered about tenure as the interest rate charged is dependent on outstanding balance and not on tenure. Is it OK for me to continue paying double the emi every month without getting the tenure shorter? Or do I tell the Bank to reduce the tenure?Q2: Do I go ahead with the MCLR rughtaway or do I wait for some note time as I think that home loan rates will go further down?

1. The bank manager is right in saying that there is no need to change tenure. It is automatically taken care off. Yes, you can continue making prepayment. Tenure will adjust automatically.2. Your guess is as good as mine. Check the process and cost of switching before making a decision.

Thanks for answering question one. The only reason I feel that I should ask the bank to reduce the tenure of my home loan is because the interest portion of the emi(after making prepayments) would be calculated basis 21 years instead of 15 years and if that is the case than I am paying more interest to the bank than what I would pay if the tenure is shorter. Please help me with this and please tell me that I am wrong.

To explain to you my understanding, the outstanding balance of 15 lacks would be converted into emi and the emi would have interest portion according to 21 years( which will be higher). If the tenure is shorter, then emi portion will have lesser interest. Hence I thought that I should also ask the bank to reduce the tenure instead of just prepaying and that is why I felt that what the manager is saying isn’t totally correct. I don’t know how the loan function works but just wanted to clear my understanding. Would be glad if you can explain how the prepayment function works and also if it is solely dependent on the outstanding balance irrespective of the tenure.

SirNeed advice, My home loan is passed in March 2016 ( Rs.45/- lac) on base rate of 9.30% + 0.25% of margin money . It is construction link plan( SBI MAX GAIN). Total amount release till date is 25 lac, having a tenure of 20 years.Should I switch to MCLR, they are charging 0.4% on outstanding amount + service tax.I have plan to pre-pay the same in 15 years in future.

Hi Deepesh,I took a home loan of Rs 30L from Central bank of India around 3 years back. Today, when I visit bank branch (Ghaziabad) to switch into MCLR then manager informed me that this switch is available only for the new customers and the recent loans (1-APR-2016 afterward). I am confused if this depend on the WILL of bank to switch or not. I am ready to pay processing charge but bank is not ready.

Yes, you will have to wait till the next reset period (before your interest rate is adjusted downwards).However, you cannot be sure if SBI will pass the entire cut to you. They may cut MCLR and increase spread (as they did this time). Difficult for me to comment what SBI will do.Base rate will also go down. However, you can expect the cuts to be slower in case of base rates.Prepayment reduces the benefit of switching to a lower rate.

I have taken SBI Maxgain Home Loan in Jan 2013 for 20 Years, Presently My outstnding is 45lacs. In case of Base rate regime, base rate cange as bank change it but spread will remain fixed over the tenure. What about MCLR+spread? Will spread remain constant OR it will be changed after 1 year period?

Dear Sachin,Does your loan agreement have any provision for change of spread?If the spread is hardcoded and there is no provision to change it, it is constant.Even otherwise, it is not easy for the bank to change MCLR spread.Hence, spread is quite likely constant.

Thanks for your comments, guidance.Please also help me. I have taken home loan of Rs.18 lakhs from Bank of Baroda at fixed rate in January 2015 to be repaid in equated EMI of Rs.22699/- in 11 years. I am a govt servant.

Now bank has asked my consent to switch over to MCLR system. I am planning to repay loan before March 2021.

I forgot to mention my name. Total loan period is 11 years. Tenor is 9 years. EMI @ Rs.22699/- for 133 years, total amount to be repaid in 11 years = Rs.3018967/-. Till December 16, I have repaid Rs.5,22,000.

Hi Deepesh,Recently i have switch my loan from Base rate to MCLR in Central bank of India. They charged me 0.50 fee + Service tax.I wanted to ask you about spread. In 2014 i have taken loan with (Base Rate + 0 spread) and while migrating to MCLR CBOI charge me (1year MCLR + 0 spread). (old rate 9.70/ New Rate 8.50)Do bank have right to change my spread future? and In which scenario they can change spread?

Hi Madhav,Spread will most likely stay constant. Banks can’t change spread that easily for the existing borrowers. Full risk profiling needs to be done. Doubt banks will go to that extent.Suggest you go through the loan document and see if there is scope for changing the spread.

Thanks Deepesh, Why i was asking because recently SBI change from 20 bps to 60 bps so thought to check with you.Just one more think post MCLR Migration do i need to approach bank for new Loan documents? As such they have not issues any thing to me but in Netbanking i can see the new rate. Please advise

Dear Sir, i have taken home loan from axis bank in 2014 and the outstanding is 35 lakhs. the current interest rate is 9.25. Now the mclr is lowered to 8.65. i am asking your opinion to whether shift from base rate to mclr or not.

Dear sir,I have taken a home loan from Axis Bank.In Oct 2014 and the present interest is 9.25% and mclr is 8.15%. the bank is charging 10000/- for switching from bolt to mclr. Is it advisable to switch. Kindly advise. Hari Sudhaker

I have an outstanding Education Loan of 19,10,945 from CBI. They are asking a fees of 0.5%+ Service Tax for switching the loan from Base Rate (9.7) to MCLR (8.5). I am planning to repay my loan as soon as possible( within 3 years). At present i am paying (5,60,000 yearly). Suggest me what option should i choose. Are there any chances that MCLR would exceed the base rate in near future?.

I have a SBI maxgain OD home loan of 35L @9.46% started on Jan 2016. Is it advisable to switch to MCLR which the SBI is offering now @8.7% and charging around 0.5% fee of outstanding amount. Please advice!

Hi Deepesh jiI have taken my home of 20L in april 2014 with tenure of 20 years from syndicate( current rate 9.60%) and now pending amount is 17.35L. I plan to complete it before 2028 as i m paying 25000 instead of emi 19863. Now, switching charges to mcls (8.75%) is Rs 10000. Is it advisable to switch to MCLR now or wait for some time.ThanksNaresh Sharma

I have taken a HL of 9,30,000 from SBI in 2009. Currently i can see the ROI is 9.40%. is it advisable to shift to MCLR now? They would be charging 10000 for shifting to MCLR. And the tenure of the loan was 15 years. Hope i can close this loan with another 60 months of EMI ( current EMI is 13,000 pm). But would like to know if i switch over to MCLR is there any benefit for me.Other Details are as below:

I have availed an education loan of 1400000 on floating ratein 2012.i wanted to switchover from base rate to mclr.the bank does not pass on the benefit of reduced interest which is now chargeable after switchover at one year reset basis.is the bank justified in doing so.

I have taken loan from central bank of india .My loan withstanding today is approx 44.5 Lacs with interest of 9.35%.Just now I have found mclr which is maximum of 8.5% for 1year tenor effective from 01.01.2017 for central bank of India.is it possible for me to shift loan.Please give me your advice with other possibilities.

How to identify whether my loan is MCLR or base rate? I have taken Max gain home loan from SBI in Jan2015. I have parked a lot of amount in it and now have available balance of 3200000 out of 3800000 . The rate cuts were passed on to me by my bank till some time. But now it has stopped. Its 9.35% at present. My wife is the first owner of this home loan. Please advise shall I switch to MCLR?

Sir,I want to know only one point that is ICICI Bank is charging fee of .25% on conversion of Housing loan sanctioned base rate in the year Nov.2015Rs.65,00,000/- ( Present O/S 62,60,000)@ 9.55% Now for conversion to MCLRThey are asking me to pay .25% of outstanding amount Approx. 36,000/-Pl.guide me whether any ceiling is there on fee. I came to know some banks have ceiling on it. What is actual RBI instruction to Banks.

Dear Sir, i have taken home loan from bank of India in September 2014 and the outstanding is 17.45 lakhs. the current interest rate is 9.65. Now the mclr is lowered to 8.65. i am asking your opinion to whether shift from base rate to mclr or not ???

Firstly Thanks for the detailed and helpful article. My husband and I have a hdfc home loan (floating) of 60 lakh disbursed on 31 march 2016 for 15 years tenor @ 9.5% roi. Now hdfc ltd is not offering mclr but to compete with banks they have offered to decrease our interest rate to 8.65% for a conversion fee of rs 7000 + service tax. Meanwhile bank of baroda is offering a special scheme wherein we can switch our loan at their mclr of 8.35%. They have waived off the spread/ markup till march 2017. The switch fee is same as hdfc conversion fee. Reset period is 1 year. What do you suggest?Second question- in either case when we get a lower interest rate is it more advisable to shorten the tenor or lower the emi?Lastly do you suggest we wait for the budget tomorrow before making any changes or take the rate cut asap so that it is effective from feb itself?

8.65% looks quite good at the moment. Moreover you do not have to do much apart from paying a fee. Please do understand terms and conditions of such switch. MCLR is not applicable to HFCs.Banks are relatively quite transparent with MCLR.Have you worked out the additional costs you will have to incur in switching to Bank of Baroda?

No additional costs as it seems. I asked hdfc and they said there are no foreclosure charges. Bob will take 7500+ tax only. We have to give them a list of docs and they will disburse within 10 days they say. I’m not sure if we should make a switch to mclr system just for 30bps

Hi Deepesh, Great to see this article, thanks. Query 1: Referring the table, one can use it only for an year’s time since “reset” will apply for every year which may go UP/DOWN. Hence, benefit needs to be evaluated every year just before the time of reset? If answer is YES then Query 2: “switch fee” charged on the outstanding balance need to be compared with total current year benefit and take a call. Is the understanding correct?

Thanks.1. You are right. This is one of the limitations of my analysis. Am not sure if I got second part of your question right.2. No. You have to compare the benefit for the entire term (even though you cannot calculate the exact benefit since you do not know how MCLR will change over the years).

Thanks Deepesh. Actual benefit of full tenure MCLR is notional hence cant be considered practically as i see. To top it, the recent budget removed “interest on borrowed capital” exemption capped to Rs. 2L making the interest portion taxable component. Hence overall loan has become expensive for atleast next FY.

When you are doing cost-benefit analysis, you need to look at the entire term. Most likely, your bank will only change the tenor. Hence, going by your approach, there is no difference while that’s not the case.No. Budget only seeks to cap the loss under income from house property at Rs 2 lacs. That is different from interest paid.Moreover, tax benefit for interest paid on home loan for a self-occupied property has been capped at Rs 2 lacs for quite sometime.Hence, nothing changes for self-occupied property and even for smaller loans for let-out property.

I have a Home loan with SBI 9.1% for 56 Lakhs + top up of 20 Lakhs at 9.6% disbursed Oct 28th 2016. Do you advise me to switch both the loans to 8.5% by paying 0.58% charges. Any other advise to save is also welcome.

I have a joint loan with my brother from SBI. The loan was taken in Oct 2015 at 9.3% for 70L. The bank is asking for around 22,000 (plus taxes) to switch to MCLR based rates, which will bring down the rate of interest to 8.8%. Based on your article, looks like a switch is beneficial. However, the charges seem to be very high. Can you please suggest if it is really beneficial for us to switch to MCLR?

Dear Kalyan,You save 0.5% as on now. Looking at the outstanding amount, it may make sense to switch.However, please appreciate the limitations of my analysis.You may lock in a high spread too (you can’t do much about the spread though)

I have 17Lakhs Loan and interest rate on Homeloan is 9.40%. Bank is asking Switch Max (0.46% of 17Laksh or 11,000rs). Will it be beneficial to Shift to MCLR. They interest will go to 8.65% by paying above charges. Please suggest.

I have 17Lakhs Loan and interest rate on Homeloan is 9.40%. Bank is asking Switch fee – Maximum (0.46% of 17Laksh or 11,000rs). Will it be beneficial to Shift to MCLR. They say interest will go to 8.65% by paying above charges. Please suggest. My Loan Tenure is 10Years completed 2Years already. has 8 Years to Pay my EMI. Please suggest is it beneficial to Move to MCLR.

Sir’I have 14.60 Lakhs Loan on 05/06/2016(SBI) and interest rate on Homeloan is 9.50%. Bank is asking Switch fee – Maximum (0.46% of 14.60 Laksh or Rs 11,700). Will it be beneficial to Shift to MCLR. They say interest will go to 8.65% by paying above charges. Please suggest. My Loan Tenure is 20 Years. As per your article(20th october 2016) RBI says all lone sanction on or after 01/04/2016 will be linked to MCLR. Please suggest Move to MCLR or talk to bank Manager.

Presently i have OS homeloan of 31.5lakhs at 11.3% ROI from LIC, i want to switch it over to other bank, like SBI, HDFC etc, Which one would you suggest so i gain from MCLR facility plus lower EMI, as i have other priorities to fulfill due to unseen circumstances. I am based out of Pune.

Please advise, best transfer for Homeloan, and MCLR is it advisable and how?

Sir,i dont know about this mclr.i m from rural area.bank doesnt tell me about this before yesterday.bank said that rbi has restrictions to told mclr to customers.is it true sir.then i search on net i got this blog.i m so happy.my frinds has also doesnt know about this.i have sbi home loan of 13 LAKHS in oct 15 intrest rate of 9.5%.1 st installment loan on 15/2/2016 & 2 nd last on 31.1.2017.last 5% remains.loan tenure is 20 yrs.when i ask about rate differences of loans in sbi bank. They told me about MCLR.and CHARGES 7500/- for benefit of 8.65% rate till to next 5-7 yrs.Pls.suggest benefits of this mclr to me for how many yrs & how it is useful for me.i m eligible or not.or any other scheme possibilities.Outstanding amt.- 12,90,420/-Drawing power – 13,18,522/-Limit- – 13,00,000/-Regards suhas more Bhor Pune

Dear Suhas,You can switch your loan to MCLR. There is no restriction.I have listed down pros and cons of MCLR in the post. Please go through them.MCLR is not constant. So, it will keep changing. As MCLR changes, your loan interest rate will also change.So, your loan interest rate will not stay constant and will keep changing every year.

Sir,On next week’s policy review meeting RBI is expected to announce rate cuts.Whether this rate cuts will result in decrease in base rate?.Moreover after this policy review if the MCLR come down whether i can take advantage out of it by switching to MCLR by next month .

Hi Mithun,Difficult for me to comment. Banks have not been passing repo cuts to borrowers in form of base rate cut for various reasons.One reason why MCLR was introduced.What if MCLR does not come down? What if MCLR goes down and spread is increased (as SBI did)?I am not saying you should switch right away but do consider these points.

Sir,I have SBI Suraksht HL AUG’12 of 15 Lakhs in March’13 interest rate of 9.95% (9.70%+0.25%). From Jan, 2017 the interest rate is 9.30%. SBI told me about MCLR and charges 10000/- for benefit of 8.65% rate, next 1 yr fixed interest rate. Pls suggest benefits of this MCLR to me for how much amount & years.

Sir,Thank u for yesterdays advise .i also told my 2 friends & they surprise.I have maharashtra bank home loan 2008 of 3 lakh for 20 yrs.interest rate changes from 2011 10.25% to 12%due to not timely repay of emi 3000/-.but i repay emi as i have money in bulk amt in every Financial year.Today when i ask about MCLR benefit to bank they told me of increse in interest rate information from 10 to 12%.From last year i repay emi consistsntly.what i have to do now sir?Please advise me sir

SBI will not charge anything. You can go through your loan agreement for any charges.You can check with your bank too.However, there will be cost attached for documentation, MOD charges etc.Check any ancillary charges with Bank of Baroda.

Sir, My name is Sachin Satpute I am very confused as I am not familiar with all this banking terms. I am availing Max Gain Home Loan i.e Base rate+Spread having interest rate of 9.5%. My outstadning loan is 15 lakSo Please suggest me on- shall I go and change to MCLR to reduce my tenures with interest rate of 8.65% or is there any way to get reduced rate of 8.65% to maxgain account?

My name is Ajay Nair. I have a maxgain loan from SBI with Base rate of Interest=9.3% .Outstanding loan amount is 54 Lakhs. Loan tenure is 25 years. When I checked bank they had told me that If I switch to MCLR new R.O.I will 8.8% and they will charge Rs 18916/- for switching over to MCLR. Please advise whether it will be benefitial if I switch over to MCLR.

Hi Ajay,Please appreciate the limitations of my analysis.If everything stays the way it is for the entire term, switch makes for a wise decision.Do note you are locking in a reasonably high spread.If I were you, I would have probably switched.

I have a home loan from SBI for about 28.8 Lacs.its been 2 years now, and now the outstanding balance is 2765000.My interest rate is 9.4% as shown in net banking.Is it helpful to switch to MCLR, SBI people told if I switch to MCLR it will be 8.8% for the next 12 months.Kindly let me know your view on this.

So, If I change to MCLR route, I will get it in 8.6%. Processing charge will be around 22k. Is it worth to change it to MCLR route? I have a plan to do pre-payment and complete the loan from 9.4years to 7years.

Thanks for all your posts. Very informative.A quick question:I have a housing loan of 5 years now. 10 years to go. Loan amount is 19Lakhs. Interest rate currently is 10.50%. Please advise if it is worth to switch to MCLR or be in base rate EMI only.thanks in anticipation.Mahesh

Are there any conditions that need to be fulfilled for switching from base rate to MCLR, applicable to retail loans/corporate loans?? If so, what are they for each i.e retail loans and corporate loans??

Apurva,Somehow the numbers shared do not match. With these details, the loan gets repaid much earlier than mentioned by you.In any case, the choice is to whether to pay an additional Rs 54,000 to go from 8.95% to 8.55%.Think it is a heavy price. Moreover, switching lender is not without hassles.You may be better off using this Rs 54,000 to part prepay loan.

I AM HAVING AN LOAN WITH AXIS BANK WITH 11.25 % BASED RATE CONCEPT , NOW WITH THIS MCRL CONCEPT THEY ARE DEMANDING RS 5000 AS SWITCH CHARGES , WHERE AS IN CASE OF FLOATING RATES CONCEPT THEY SHD CONVERT FREE ? OR NOT pL GUIDEDHAWAN_JITESH@REDIFFMAIL.COM9830080705

First of all, Thanks that you share such information in more details.I would like to know more about my case (scenario).

I am having the loan with ICICI Bank. I have visited the nearest ICICI Loan Branch for my query to switch from base plan to MCLR.

Now, what I come to know that, the receptionist first tell me that, You have to pay 18,000 (approx) based on some percent of the principal. Then she told me that, Let me brewage it, and then she told me that that amount you need to pay is 5750 only.

I am confused here, why suddenly they reduce the number of conversion fees. I don’t know why?

Also, She told me that, there will be mostly benefits of 3 EMIs only. That is fine for me. But she told me that, even I keep MCLR scheme for the whole tuner, that will effect only 3 EMIs and nothing more than that. I am wondering about this.

If the Interest rate is getting down for the whole tuner then it should effect the whole tuner and not only for 1 year.

Dear Shreyash,Bank can decide what it wants to charge for the switch. You should be happy that they have reduced the fee.MCLR change will affect the entire tenor. Just that MCLR has reset period. Think for ICICI home loans, it is 1 year.Your rate will stay constant for 1 year and can change after that.

I HAVE A OUTSTANDING LOAN OF RS 19,13000/- AT SYNDICATE BANK WITH BASE RATE BASE ROI 9.6%. SHOULD I OPT FOR SWITCH OVER TO MCLR BASED ROI of 8.75% AT SYNDICATE BANK WITH A SWITCH OVERE FEES OF RS 10,000/- OR TAKE OVER THE LOAN TO STATE BANK OF INDIA WITH ROI 8.51%. TAKEOVER PENALTY WAS WRITTEN @ 2% OF OUTSTANDING AMOUNT AT THE TIME OF DISBUSEMENT OF MY LOAN IN THE YEAR 2013. SBI WILL CHARGE LEGEAL AND VALUATION FEES APPROX 8000/-.

I HAVE A OUTSTANDING LOAN OF RS 210000/- AT UBI WITH BASE RATE(9.3) , As per UBI website HL interest rate is MCLR_0.1=8.6. Manager says even if i switch to mclr, interest rate will not go dowm. My Interest rate will be MCLR+0.8=9.3. Hoew this possible?, Is Iam eligible to get 8.6%?

Dear Amjad,If the bank is offering you loan at MCLR + 0.8%, it will be around that mark only.Just ensure that the bank official is not trying to dissuade you from switching by providing false info.Did you ask why the spread is so high?You can take a balance transfer to another bank.

Thanks for providing lot of good information related to loans. I have a home loan of 60 Lakhs with SBI and borrowed in October 2016 at 9.1%. I switched this loan from LICHFL. They are asking me to pay 0.58% to reduce the interest rate to 8.5%. Please suggest if it is good idea to change my interest rate. Also, is this a one time payment or should I pay 0.58% fee for every change / revision in interest rate.

Hi Deepesh,I have SBI max gain loan (base rate regime) and my effective Int rate is 9.25% as of today (base rate of sbi is 9.25 + My spread is 0). I understand that the spread is decided based on the risk profile of the customer. Right now MCLR (1 year reset tenure) of SBI is 8.0, and in the bank website it says that the spread is .65 for normal HL (8.65 effective rate) and .75% for maxgain (8.75 effective rate). Is the spread for MCLR is based on the risk profile? If that is the case my spread will still be zero, am I correct? Conversion fee to MCLR is .48% of outstanding loan amount. Is it worth to do a switch now.

Hi Deema,Thanks!!!Banks have quite a bit of leeway in deciding spread.Spread in case of base rate is different from spread on MCLR. That does not mean your spread in MCLR linked loan can’t be zero.However, at this point, it is not zero with SBI.

Hi Deepesh,SBI threw an attractive net reducing the MCLR to 8% and making it a big media news in the country. Not many understood the fact that they increased the spread to 0.7% to go with it from 0.25% overnight.The current MCLR of 8% is only temporary until demonetization money gets dried up beyond which I would think they will take the MCLR to 8.5% or so.And they are purposefully keeping the base rate same for last 18 months. What this is doing to base rate customers can be seen from their queries on this blog.They are ready to switch to MCLR with such high spread which is only detrimental them in the long run. They also need to pay about 0.5% of the outstanding for the switch. Exactly what SBI wanted their customers to do, pay high conversion fee and lock in high spreads which will pinch them after a year while helping the bank.This is appalling from SBI and some of the other banks are not far behind.I hope you give the right advise to the customers on what might be the situation next year if MCLR goes up.

Hi Pradeep,I am also sceptical of almost everything a bank does. But let’s not be paranoid.Yes, interest rates may move for the worse. So be it. That’s a risk borrowers are taking.I don’t buy into the argument that the banks are deliberately keeping base rate loan high. Banks have always been reluctant to pass interest rates cuts (and this time is no different).By what percentage will be MCLR go up next year? We don’t know. We don’t even know if it will go up.In my experience, interest rate forecast is not that simplistic.In my opinion, it is a good choice to shifting from base rate to MCLR by paying a fee if the gap between existing base rate linked loan and MCLR loan is too high. MCLR is clearly more transparent.If the interest rates were to move up, banks wouldn’t be shy raising the base rate.

I agree banks have always been reluctant in passing the rate cuts on base rates in the past, but never before have they simply left base rate unchanged for so long and despite the MCLR falling from 9.4% to 8% during this time. Deposit rates have also fallen down to 7%.So what are we talking about here? Its a scandal without a doubt.They are hunting for base rates customers to switch by paying a hefty conversion fee with high spread.I know interest rate forecast is not easy, but come April 2017, the 1st ever reset of MCLR customers will kick-in (those who took loan in 2016 April and henceforth). They will get to lock-in 8.1% for the next 1 year (MCLR of Apr 2016 was 9.4% and spread 0.1%).SBI wont want to give such low rates to those customers, so whats the option? They will raise MCLR and reduce spread effectively keeping interest rates same for new customers but existing customers will also pay higher rates.I know I am speculating, but you will see this play out if not in April it might be June.Whats in it for customers who want to switch from base rate to MCLR at that time? They will get lower spread at that time which will only help them in the long run if they have 30-40 lacs loan left.Now if they switch, after paying 0.5% of loan as conversion fee, they will realize the bad mistake in early 2018 when the reset happens.MCLR may look transparent, but the spread clearly isn’t. MCLR+Spread forms the interest rates, not MCLR alone.I am only talking about SBI and others which have high spreads now.

It is not a scandal.Banks can’t control MCLR beyond a point. Hence, if they have to keep effective interest rate high (or low) for any reason, they have to play around with spread. They don’t have any option.You can reach a conclusion only when the interest rates start rising and then you see MCLR rates above Base rates.Even then, it is a risk that borrowers are taking. No free lunch.Before that, it is sheer speculation. And I don’t want to do that.Take a call based on how things stand today.Many are saving up to 70-80 basis points per year (at least for now) by paying 50 bps.

Hi dipesh,Thanks for all the info. I have same query as others.Loan amount 1747000, year 2013,25 year tenure.Current outstanding 1648000, interest rate 9.5% SBI maxgain loan.Switching to mclr fee 11500. Going to clear the loan in next 5 years.Should I switch?

Hello Deepesh,First of all thank u very much for sharing your knowledge. i have taken 23.5 lacs of home loan from SBI in April 2013 with 20 years tenure and current interest rate is 9.5% (base rate) and outstanding is 20 lacs.I want to switch to MCLR but you said that bank will reset MCLR every 6 month or 1 year and so the new rate apply accordingly.So for me,1)In which month should switch to MCLR to get maximum benefit?2)In which month SBI reset MCLR and for how much time?3)Is it beneficial to switch to MCLR?Please help me on this.

1) It means if i switch to MCLR, my new rate will be change to 8.65% from current 9.5%, m i right? and will it effect immediately?2) What they mean by 1 year MCLR?3) And after i switch to MCLR, if RBI reduce or increase the rapo rate, it will effect immediately to my interest rate?

I really appreciate if you help me on that, as u know some time even SBI officer dont know about it and they mis-guide some time.

I have taken housing loan in July 2017 from SBH Bank with MCLR rate of 9.65% now i requested to bank to revise MCLR as per latest rate. But bank didn’t agree by saying it can be reduced before 1 year. Their is no such clause part of my home loan agreement. Kindly advice what to do?

This is Vinayak , I had taken HOME loan from State Bank of India Max Gain @9.45% floating rate.( RATE 9.25% + .20% SPREAD).Details of my loan as under.Loan Amount Rs.3790000Disbursed Amount Rs.37,11,174EMI Rs.31896/-Tenor 30 yearsEmi Started from March 2016I had visited the bank for changing the rate of interest from base rate to MCLR.For switchover bank is charging 0.30% plus service tax on Drawing power of Rs.3790000/-It is coming approx Rs.12972/-.After this my effective rate will be 8% MCLR + .75% SPREAD.

Please guide should I stay with the current rate of interest or go for switch. Further I am planning to prepay loan after april 2017 and prepayment amount will be max Rs.500000/-.Also confirm whether i have to change the EMI amount or reduce my tenor.

Hi Vinayak,Assuming things stay the way they are, switch seems like a good choice.Your prepayment decision will reduce the benefit of switch. However, that does not mean that you should not prepay.Please appreciate the limitations of my analysis (as mentioned in the last para).Additionally, do note that you are locking in a very high spread.

My name is Anil Kumar.I had applied for home loan in AUG2013 with SBI(MAXGAIN with Floating rate interest).The loan approved was 29.5 Lakhs for 30 years with ROI(BaseRate)=9.95% and EMI being 26.5K .The loan was disbursed over a period of 1 year based on House construction completion where in i paid interest amount of 20K for 1 year.Post which the actual EMI started deducting and based on RBI rate cuts the ROI got reduced to 9.5% (current).I have made prepayment of 10 Lakh so far till date. The outstanding is 19.5 lakh with ramining tenure ~26 years.I will not be doing any prepayment for the next 3 to 4 years and will keep it to simple EMI (26.5K).

Should i opt to switch from BaseRate(9.95%) to MCLR(8.65%) ?Does switching to MCLR benefit in my case ?The current MCLR conversion fee is ~13K.Request your opinion for the same in the long run.

Dear Anil,Assuming things stay the way they are, switch seems like a good choice.Please appreciate the limitations of my analysis (as mentioned in the last para).Additionally, do note that you are locking in a very high spread.One of readers commented that you can negotiate the switch fee. Try doing that.

SBI seems to be facing the heat. When I went to SBI-RACPC to get the list of documents (for a planned loan switch to Bank of Baroda) I was directed to have a work with the AGM before proceeding. The AGM spent a good 20 mins and tried to convince me to stay with SBI. As a fact SBI has reduced the switchover fee for moving from base rate to MCLR from 0.5% + service tax originally to 0.3% + service tax. Further half of this amount can be waived off at the discretion of the AGM and he was willing to do that for me. So final switchover fee would just be 0.15% of drawing power + service tax. So the switchover fee is nominal now but the spread is yet too high. The AGM advised me to hold on for a while before deciding to switch over to MCLR.

I had sbi max gain home loan @ 9.55 on base rate basis before 1st jan 2017 because i had took home loan on feb 2016 to MCLR rate was not applicable to me at that time, after 1st jan 2017 it became 9.5 due to rate cut in base rate too, i had total outstanding around 4126000, i had requested to convert my loan from base rate to mclr, now they converted my loan to mclr. They charged me around 14239 and given 8.8%.

Just would like to know your opinion too on this, will i be get benefited even after paying around 14500 Rs. (I believe in long run i surely get benefited…..but don’t know the future)…just request to share your thought on this….

Here you can see that 0.75% spread that is quite high.Now my question is…

In future if MCLR increase to 8.5% then SBI charge me 9.25% (8.5+0.75 spread)so here. will SBI reduce the spread for existing customer? and if yes how much approx. If sbi not reduce the spread.. it means should i have to pay this high spread for all tenure?

Anil,Your analysis is correct.Bank will not reduce the spread (quite unlikely).If you switch now, you are exposing yourself to that risk. And you must be aware of the risk.But, you can’t say that base rate won’t increase when the MCLR goes up sharply.

Dear sirI took home loan on May 2015 from Axis bank. current ROI is 9.25% and after switching to MCLR it will be 8.65 %. current outstanding is Rs 14.2 lacs ans EMI is Rs 14237/- and tenure is 20 year.fee is approx. 9000. Please suggest for switch.

What would be MCLR interest rate after the rest date. Take, I have taken the home loan of 8.65& by DEC-2016 with 6 months rest period, means my next rest month would be July-2017. What is the interest rate will be lived to my home loan, if July17 bank MCLR rate 9.2%. After 6 months any time my interest rate will be revised based on RBI repo rate cut or every 6 months interest rate will be fixed.

MCLR will be revised every month but for you the revision will happen every six months.Therefore, even in MCLR changes in say March or April, for you the change will be applicable only in July.Please understand your MCLR is not so tightly linked to repo rate.

Dear Sir,I have a HDFC home loan of around 58 L.ROI for HDFC for current is 9.15 which will change to 9 from April. Axis is offering me MCLR of 8.5 % with 6 months revision cycle. Loan trf fees are around 20K which all are govt fees and no processing fees.

Dear Shekhar,I am not sure if you get MCLR concept clearly. Suggest you go through the post again.You do not get loan at MCLR. You get loan at MCLR + spread.You need to consider overall cost.No part of the analysis done is carved in stone.There are many assumptions.And those assumptions can go wrong.

If the EMI remains the same (everything else remains same, only interest rate changes), you will essentially save a few EMIs. However, you can’t be sure about that as MCLR keeps fluctuating. Benefit will likely come towards end of the loan tenor.2. In your case, when you are already on MCLR, and Axis Bank increases MCLR an HDFC does not, then you got yourself a bad deal. Btw, how do you know that Axis Bank will increase MCLR and HDFC won’t.

Pls offer your views on my first query i.e.I have a HDFC home loan of around 58 L.ROI for HDFC for current is 9.15 which will change to 9 from April. Axis is offering me MCLR of 8.5 % ( 8.15% + .35% margin i.e. spread) with 6 months revision cycle. Loan trf fees are around 20K which all are govt fees and no processing fees.

You will save approximately 2 EMIs if you switch (assuming everything stays the same).Therefore, switch may be good choice.The issue is the high spread (at the moment), which might cause problems later.Please understand the limitations of my analysis (as mentioned in the last para).

Pls offer your views on my first query i.e.I have a HDFC home loan of around 58 L.ROI for HDFC for current is 9.15 which will change to 9 from April. Axis is offering me MCLR of 8.5 % ( 8.15% + .35% margin i.e. spread) with 6 months revision cycle. Loan trf fees are around 20K which all are govt fees and no processing fees.

I have to take decision to switch form base rate to MCLR. i m doing some calculation. i need your help for the same.

Current Base rate is : 9.50MCLR (8 + 0.65) : 8.65Difference : 0.85 per year for outstanding 20 lcas.Benefit for first year : 17000 rs

As per my calculation i get benefit Rs 17000 for the first year and the switch fee is 11500/ in SBI.

So this is fine for me for the first year. now we don’t know about after a year what MCLR will be but i want to know that as per your experience Do you think that MCLR will be alyways low then Base rate? if this is the case then i will not lost anything.

Hello Deepesh,Great Information I have got from here.I want your opinion in switching our home loan from base rate to MCLR.I have home loan with Axis bank for 10 years tenor started in 2013 and current base rate is 9.25.Pending loan amount is 14 lacs. Bank if offering 8.5 interest rate on basis of MCLR+spread and MCLR will be revised every 6 months.conversion charge is 8k.I think we will save close to 60K here but not sure if we should go with this as MCLR will keep changing. Please suggest.

Hi Jyoti,Thanks!!! Request you to share the post with your friends.You have already done the maths. Not much I can add.There will always be this risk of MCLR moving up sharply (and along with it base rate is not increased).No free lunch. You have to live with this risk.MCLR is more transparent. Switch may be a good choice.

Hi Deepesh,I have an outstanding home loan of Rs. 33,70,000/- with Axis with base rate of 9.25%, outstanding tenor is 166 months, EMI is Rs. 36,051/-.Today Axis is offering me MCLR of 8.5% (fixed for next 6 months) with a conversion fee of Rs. 8,600/-.

I am also planning to make regular pre-payment of Rs. 50,000/- every 2 months.

Hi Anil,Assuming rates don’t change (unlikely to hold true) and you repay 50K every two months, your loan will be repaid in a little over 72 months at 9.25%At 8.5%, it gets repaid in 70.5 months. You save 1.5-2 EMIs.Looks like a good choice. Even if you were to prepay using Rs 8.6K, it would still take approx 72 EMI.So, switch is a good choice.However, please do understand limitations of any analysis (as mentioned in the last few paras).

A question comes in my mind with this pre-partpayment is that, will it be wise to pre-part pay home loan or make arrangements for emergencies or invest the extra amount in Sukanya Samrudhhi or PPF, etc?

Also what is the most liquid option to invest the extra funds in to hedge the risk of personal/family emergencies?

You are welcome, Anil.Your first question is quite open ended. Not possible to answer in this short response. You can seek professional help for better guidance in this matter.The most liquid is savings bank account. Fixed deposits and liquid funds are also good options for emergency fund.

Great analysis & information. Thanks.I have a query. Currently i am having a House Loan for 30 Lakhs @ 9.75 % Interest rate started from Oct-2015 and my current EMI is 32000.Recently i have contacted ICICI for negotiating the interest rate. They have informed that they can offer to switch to MCLR-1Y me @ 8.8 % with a processing fee of 0.5% on outstanding 28 Lakhs. As per your analysis i have decided to move to MCLR. My query is that the EMI 8.8 will be freezed for another 1 Year and change in interest rate after 1 year will be done at free of cost or any charges will be levied.

Hi Ashish,You are welcome.Request you to share the post with your friends on Facebook,Twitter and Whatsapp so that they can also benefit.ICICI is offering loans to new customers at 9.65% p.a.? Looks too high in current scenario. Can you please recheck?Please provide info about MCLR and spread too.Do not like this “without fee” offer. You will unnecessarily lock in a very high spread.

Dear Deepesh,Appreciating your valuable service in financial sector. I found your posts are really meaningful. Here is my case, I have the home loan of 22 lacs. with ICIC bank with 10 years fixed scheme (I’m in second year now) with the interest rate 9.65%. I have the offer in the same bank to switch it to MCLR for 8.7 % (8.2+0.5) with processing fees of 1.5 % (of loan amount) + service tax 15% (I hope in total it comes around 40,000). Please advise can I opt to switch to MCLR. (I don’t have any immediate plan of Prepayment)

Thank you for quickest response. However since we are moving within same bank(icici) charges are as mentioned above. Also though we are planning to move to Floating rate, there is a prepayment penalty of 2% on existing principal. Also moving to other banks we are getting floating rate @ 8.5% than 8.7 %…Currently we are paying in fixed @ 9.65% for next 9 years. What do you suggest ?

Hi Deepesh,Thanks for your swift reply. The balance loan tenure is 14 years, the EMI is 24000. (As I said earlier I’m in 10years – 9.65% fixed interest scheme with ICICI, the switch fee is 40000). So your valuable input need regarding switch to MCLR or whether can I continue with the same current scheme.

Hi Vijay,If the interest rates stay the way you are:By switching to MCLR, you will save approximately 16 EMIs. On the other hand, by using Rs 40,000 towards repayment, you save approx 8 EMIs.So, switch may appear to be a better choice.However, please appreciate the limitations of my analysis (as mentioned in the last few paras of this post).For instance, MCLR may start inching upwards in a couple of years.

Do you foresee reduced MLCR trend in coming ages? Against all the odd challenges the BFS facing now – considering the Industry growth (demand) and real estate prices, behind the enormous amount bagged in all Nationalized banks (due to banking/transaction, demonetization)..is there a possibility of reducing MLCR Trend ?

I have availed an education loan a sum of INR 262880.00 in the year 2009.Currently outstanding amount is INR 297566.72, loan maturity date is 2025.loan repayment is monthly around INR 5000 at rate of interest 11.85, it is under PLR. The bank people suggested for switch over from PLR to MCLR. Applicable rate of interest after switch over would be 10.25%.And charge for this switch over is 10000.So kindly need your suggestion whether i go for MCLR or remain as it is, which is benefit for me?

Very useful comments you shared but i am not able to understand (Due to non accounting background).I have SBI Max gain Home Loan of 15 lakhs taken in August 2012. Currently my rate of interest is 9.5%. I spoke to SBI, they told me a charge of 12000rs to change existing interest rate to 8.5%.I think its good for me to switch from Base rate to MCLR isn’t it? (My interest rate going to change from 9.5% to 8.5% ).

Dear Niti,There is no black and white answer. It is possible that a switch may backfire at a later date.Therefore, be aware that you may rue this decision to switch later. Be aware of the risk involved.What is the loan amount outstanding? and loan tenor?Additionally, please tell what is MCLR and spread for the loan bank has offered.

MCLR is variable. It will get reset every year (for SBI loans).So, if you switch to MCLR now, MCLR will be constant for 1 year and will reset after 1 year.After the reset, MCLR will again stay constant for 1 year and the cycle will go on.

I borrowed loan from SBI of 21 lakh in 2014(MAX GAIN) , currently interest rate is 9.35 , should I opt for MCLR ? As , I read all detail and calculation which is done by you, but I can not conclude whether I should go for it ?please guide me , moreover I am planning to pre pay of some amount this year. AS MCLR base rate is much higher its 0.75% and mine is .10%.I guess in future it will create a problem.

Dear Dip,You have not provided info about MCLR,spread,loan tenure or switch fee info. Difficult to say anything in absence of such info.Switch can be a double edged sword. Yes, spread can be a problem but how long will you wait for the spread to come down.There is cost involved in sticking to a higher cost loan.

Many thanks for your reply, As I said I borrowed for loan from SBI and it is MAXGAIN for 20 years. The current loan amount is 18 lakh ( I made prepayment earlier), my current interest rate is 9.35% and base rate is .10%. In new MCLR rate of interest is 8.75% and base rate is 0.75% ,this base rate will not change up to ending period of loan as bank said, the recent procedure fees is 5600 for MCLR. There is only make 0.6% difference, that’s y I am confused. In addition I am thinking to prepay some amount. Please suggest me, whether I should go for it or not ?

Home loan SBI Maxgain-Current amount-1830000, for 20 years started in 2014Current rate of intrest-9.35% and bank base rate 0.10%.SBI MCLR offers 8.75% and base rate of bank -0.75% it will remain same up to end of loan.Planning to make part payment this year 2017, might be 1.5l

I guess it would be clear to understand you .Please suggest me ,should opt for MCLR. ?

Dear DeepeshI’ve taken a home loan of 29,000,00 in 2014 for 28 years from HDFC Ltd. @ 10.25%. Now ROI is 9.65%. SBI has given me offer of 8.6% under MCLR regime with charges appr. 12000/-. So I approached HDFC for the same and they also given me the same offer I.e 8.6% ROI with conversion charges of Rs. 4800.So my dilemma is should I stick to my current home loan scheme or take offer from SBI under MCLR regime?

Dear Nikesh,If I were you, I would have stuck with HDFC for now. No hassle of shifting your lender.Moreover, HDFC has given you a very decent deal.If I see tricks be HDFC later, I would switch to that time.

Hi Anil,It is a risk that you take. It may pay off or may back fire.Sure, you can wait for spread to come down. The question is how long?Not converting to MCLR means you continue to pay base rate. That has a cost involved.Such decisions are always tricky. Many don’t appreciate the risk involved.Good that you appreciate the risk and have taken a call to wait for the spread to come down. Again, it may pay off or may backfire.

In April, SBI has cut 0.15BPS for existing customer, now my home loan interest rate is 9.2% , on the other hand there is no reduction in MCLR , It is still 8.75% . so it is good to switch to MCLR ? As spread is fixed forever 0.75% in MCLR while in existing its 0.10%.

I have taken a loan of 38 lakhs [with 15Lakhs in OD account currently] in SBI for which they just reduced the interest to 9.1SBI is offering MCLR of 8.75% with charges around 10K.will it be beneficial for me to have switch to MCLR? Note that I am planning to prepay some amount this year.

Dear Sumanth,Decision to swtich from base rate to MCLR is already quite complex.Plans of prepayment make it even more complex.So, you are saving only 0.35% p.a. And MCLR spread is quite high too.What is the remaining tenor?

Hi,My bank (Canara bank) is ready to shift my loan to MCLR linked only on the condition that the rate would be MCLR(8.45) + 0.95 = 9.4%(my current base rate linked ROI).. However, all new loan getter would be paying only MCLR+0.2%. = 8.65%

Isnt is unfair on their part? pls suggest..

PS – they are saying that I cant reduce my ROI.. so, even if I change to MCLR, my ROI would remain the same. (i.e. 9.4%)

Hi,My bank (Canara bank) is ready to shift my education loan to MCLR linked only on the condition that the rate would be MCLR(8.45) + 0.95 = 9.4%(my current base rate linked ROI).. However, all new loan getter would be paying only MCLR+0.2%. = 8.65%

Isnt is unfair on their part? pls suggest..

PS – they are saying that I cant reduce my ROI.. so, even if I change to MCLR, my ROI would remain the same. (i.e. 9.4%)

Hi Deepesh,There seems to be one problem in your explanation about Loan taken by Mr A and the other comparison.

” A took loan in December 2016 and got loan at 8.9%+0.25%= 9.15% p.a.

While if you took loan in January 2017, you would have got loan at 8% + 0.65% = 8.65% p.a.

You should be quite happy. You have saved 0.5% of interest.

However, the expression will change after a year. After one year, suppose 1-year MCLR is 8.5%.

A’s effective interest rate will be 8.75% p.a. (8.5% + 0.25%) while you will pay 9.15% (8.5% + 0.65%). Who will be smiling then?”In case of A, You have used 8.5% which is the mclr whereas it should be base rate which should be applicable there. In that case, base rate, which is higher than mclr presently, will also rise. Considering it to be 9%, A will have to pay 9.25%. Please clarify, I may be wrong. My understanding of the situation is, as mclr will be raised in future, so will be base rate. There will be very little difference for borrower because finally banks are more powerful currently . There is only one choice he/she has, i.e. To change to other bank which is also no solution, because the other bank may also change the rate. I changed to SBI seeing its record of low rates, but now DCB bank and few others offering lesser rates.

Hi Archana,Both A and B are on MCLR but with different spreads. Guess that will clarify.Calculation methodology for MCLR and base rate are quite different. Even though both will move in same direction, the quantum of movement can be different.I agree with you. It is not as simple.Anything can happen.Please understand floating interest rate was a risk you agree to take when you take the loan.Current scenario is no different. The only issue is that you have a choice now. And that’s what leads to all the headache.

Hi again,I understand that both will be on different spreads, but are you sure the spreads are counted upon mclr in both cases? I think in case of people on PLR or base rate, it will be Base rate + spread.Regards

Now MCLR is low interest compare to Base rate, so most of them are switching the loan to MCLR in past one year. My question is in future, since MCLR is floating, is there any chance the MCLR is cross the base rate interest rate?

I am having home loan with base rate of 9.15% can I change to MCLR of 8.50%

Hi Deepesh,i read your math and logic carefully and understand your point of view. However, i’m not too sure how to plug the math into my situation. Could you please help?Here’s my situation. I have a 35l loan from Axis on Base rate and the rate currently applied (as in March 2017) is 9.75%I am working on an aggressive prepayment schedule, where i pre pay min 1 lakh per month and intend to close the entire loan by end of 2018. I am considering a switch to MCLR of 8.5% at a processing fees of 5k + taxes. My remaining loan tenure is 14 yrs and i opt for tenure reduction with each prepayment.Do you recommend i make the switch?

Hi Jill,You can switch. The fee is quite small and the rate difference is quite high.Your aggressive prepayment plans will reduce the benefit you get from the switch but still switch looks like a good choice.

Article is really wonderful, and what I really appreciate is the fact that you mentioned that there is scope of further calculation changes in your analysis depending on lot of other factors.

I also do have SBI Maxgain loan on base rate. Want to share my conversation with SBI branch manager, the information he provided is not listed anywhere on SBI or RBI or any other website.

Lot has been talked and mentioned about MCLR vs bas rate. Few additonal facts that was mentioned:

MCRL + Spread on home loans1. The sanction letter or approval letter will just mention MCLR + spread while you are sigining agreement.2. It nowhere mentions that spread will be constant and/or adjusted with every reset period!!!3. It means banks can decide to increase (or decrease, in very very rare case) the spread over MCLR sololy on bank’s descretion4. Banks may decide to take switch over charges from customer when the rates are down sharply

When MCLR goes down to let’s say 6.00%, bank may increase the spread to 1.5% to make effective interest rate to 7.5%!!!!

When MCLR goes upto 10%, rate will be 10 + 1.5% = 11.5% for old customers. For new customers they might be offering spread of 0.15%. In this scenario, they may ask customers for switch over charges to get down the rate to 10 + 0.15 = 10.15%

To conclude, whenever anyone decides to sign home loan agreement, it’s utmost important to study and analyze the home loan agreement prior to taking home loan or even while switching to MCLR or to new bank.

I am doing the same with SBI right now, have asked them copy of loan agreement, based on the terms and conditions only I will take decision.

Thanks Sanchay!!!Please share with your friends too.Agree with you completely.Banks may resort to change of spread in extreme cases. You need to check the loan agreement to see if it is possible.If the number is hard-coded, nothing can be done about it.Locking in a higher spread can also be a problem (as you pointed out).If the spread is high,you need to weigh against the higher interest that you are paying under base rate regime.For all you know, spread may not get into the comfort zone for the next 3 years.So, you have to take a call and live with it.

Could you please advice what do you suggest under the below scenario. Thanks!

Original Home Loan was 22L (was taken in Nov 2013) and the current outstanding is 19LThe current interest rate is : 9.15% (Base Rate +0.0) (Original interest rate was 10.25)Tenure is : 15 years (Approx. 10 more years to complete)It is with Axis Bank

The Current MCLR in Axis bank is 8.35%The switch-over changers from Base rate to MCLR is 0.5% or 10000 (which ever is max)

The Balance Transfer to SBI will give a interest rate of 8.65%.

Which one is good:1. Continue in the current base rate plan?2. Change to MCLR in the same bank (Axis)?3. Switch the balance to SBI?

The MCLR is 8 and Spread is 0.65.Also I have one more doubt :I am also thinking of closing a part of the loan and increase the EMI to close the remaining ASAPis it advisable to close the existing loan sooner than planned?If I go for a second home loan in the future will I get tax benefits?

I had taken home loan from SBI for Rs.40,64000, Present interest rate is 9.3% (9.1% base + 0.2% spread). Today I enquired with SBI for MCLR conversion. They were saying 8% + .8%(spread) = 8.8%. My loan tenure is 20 years. Have taken loan on Jan 2016. Please advise if shifting to MCLR is beneficial. Processing fee for switching to MCLR is 13,200.Outstanding Limit = 39,42628Also I have a feeling that switching to MCLR will increase the spread %, Which as per my understanding is not good. Please let me know your views.

Hi Raj,I do not have black and white answer to this question.Locking in a higher spread is an issue.However, you do not know how long will SBI this spread high.While you wait for the spread to come down, you continue to pay a higher rate of interest. Therefore, there is a cost involved.You can consider taking balance transfer to another bank too.

Can I wait for few months for Spread of MCLR to be reduced. Are there any chances of reduction in spread % in MCLR. Also heard that bank will automatically migrate all the base rate customers to MCLR at one point of time. Is it true?

The MCLR is 8 and Spread is 0.65.Also I have one more doubt :I am also thinking of closing a part of the loan and increase the EMI to close the remaining ASAPis it advisable to close the existing load sooner than planned?If I go for a second home loan in the future will I get tax benefits?

Hi Deepesh,I want to know if you got any info from your clients if the banks like SBI have kept the same spread (set when loan was taken) on the MCLR during the 1 year reset that would have happened since April 2017 for many customers.I am wondering if banks have started playing around with the spread since MCLR has come down from 9+ to 8+ in the last 12 months.Thanks,Pradeep

Hi Pradeep,Has spread changed for anyone? Have not checked with clients.I had gone through a SBI loan agreement. There, the spread was hard-coded, leaving little scope for change.I will keep on eye on this issue though.

Hi Deepesh,I can confirm SBI has maintained the spread (as fixed during the loan sanction) while resetting the MCLR after 1 year. In fact they did it exactly 1 year after the loan sanction. So its a welcome news I guess.

Hi Pradeep,That is a welcome news.My reading of the loan agreements had suggested precisely that. It is not so easy to change spread.You have been skeptical of the banks’ policy about MCLR and spread for quite some time now.Think you need to treat me now. 🙂

Sure Deepesh, You deserve a treat from everyone who read this blog for the kind of information you have provided.But my concerns have been echoed by RBI in their latest policy meet. MCLR, in their opinion too is not working as expected. And base rates have been discarded by banks. So lets see what RBI comes up after their internal review.There is no doubt that banks play around with the spread especially SBI. It was 0.7% in Jan and 0.4% now. This is what I predicted back in Jan-Feb that the spread will come down. 0.7% spread was fixed in Jan only to trap customers. They are imposing Mallya tax on us.In my opinion, Bank of Baroda has the best policy. They lend at 0% spread for all customers with credit score of 760 and above. People with lesser score need to pay more. This is how it should be. MCLR in any case depends on cost of their money

You are welcome, Pradeep.Banks are not saints. In any case, even technically, interest rate transmission is not as easy as it seems.Not saying this to defend banks but RBI has its motives too when it speaks about a lot of things.Banks will continue to tinker around with MCLR-spread combination.Beyond a point, it may be difficult for the bank to control MCLR (as it happened after demonetisation drive). Therefore, the banks had to resort to increasing spread. The move seems unfair but that’s the way it is.

Frankly, Mallya is a small fish. There are much bigger corporate houses that have fleeced banks much more.And banks don’t give red carpet treatment to corporates either.The problem is that the banks, given the sheer size of their exposure, can’t let go these companies bust that easily.After all, even top management is answerable to board and the shareholders.They need to report good results.And that’s why good money is thrown after bad. Clearly, not pardonable but as you can see, the intent is quite different from popular perception (at least with private banks).

Hi Deepesh,Is this the right time to opt for switching from base rate to MCLR or wait till end of June 2017 so that i can expect some rate cuts by this month end? Presently i am having home loan with SBI at 9.3%.

In April I have opted for MCLR from Max gain,from 9.35% to 8.75%. But i was suppose to get 8.65%.I just went and checked with Bank they have mentioned for RG1,2&3 its 8.65% and for RG4,5&6 its 8.75%.it depends on risk factor….I really don’t understand what is risk factors considered while they select us for these RGs. Please explain.

Hi Ronak,There is no black and white answer to this question.You can do either. You can prepay or you can invest.If you feel your family will struggle to pay this home loan in your absence, it may be a good idea to pre-pay the loan.

Your EMI burden does not decrease if you prepay the loan. Just that the loan gets repaid faster.So, now the loan is down to Rs 6 lacs.In any case, this loan will get repaid in 3-4 years.You need to see if you want to put in so much effort.

Hi,Appreciate your time and valuable advise you give to all the people here.SBI maxgain Homeloan amount 56lacs, EMI 51000 for 25yrs with current ROI 9.3%. I have already made one prepayment of 10 lacs to the bankSo as of now my loan amount has become 46 lacs with EMI of 410000My Questions:1. How many times can i further do the prepayment or the amount freeze (in Maxgain lingo)?2. Can i move my home loan from Maxgain plan to any other home loan plan of SBI? If yes what are the charges and procedure for it?3. If my Loan amount comes under 25lac bracket, then would the scheme of 8.35% interest rate (as is highlighted in advertisements by SBI) be applicable for my Maxgain plan as well, or would i have to switch my plan for that? If switch then which is that scheme?

Hi Jitendra,1. Typically, you can prepay only a limited number of times during the year. Please check prepayment clause in your loan agreement.2. Please check with the bank.3. I doubt that. Typically, such concessions are based on original loan amount.

I have a home loan outstanding of 1265000 @10.15%(base rate+spread) from BOI and remaining tenure is 6.2 yrs(served 7.10 yrs already). Bank is offering me a switch from base rate to MCLR with 10000 INR as processing fee and new interest rate of 9.65%. He told me that I’ll save 36000 by doing so (net saving 36k-10k(proceesing fee) = 26k) and save 1.5 yrs in my tenure. Does it make sense to switch now? Please provide your suggestions.

If you switch you save about 2 EMIs (1.84) by paying Rs 10K. However, the saving will be at the end of the tenor.Remember, you will have to pay Rs 10K + GST = Rs 11.8KInstead by using Rs 11.8K to prepay loan, you will save about 1 EMI (1.2).Your loan spread is quite high. Have you considered switching your bank?

Thanks Deepesh! I haven’t considered switiching option since I don’t have much idea about it and have another loan from same bank as Top up loan which is already on MCLR that I took last year. Currently at 9.2%.(4 yrs remaining now). Do you think switching it would be more beneficial considering I don’t want to go through too much pain. BOI is already giving me pain as they are very slow in everything. I checked on switchme.in but it shows me that I am on best interest rate and shows I won’t save much. Do you think otherwise? Thank you for your insights on this. Also, considering I don’t want to go through too much pain would you advise me on what should I do, i.e. change interest rate to MCLR(by paying 11.8K) or prepay loan by paying 11.8K?

Hi,The problem is your spread is quite high. When I asked you to consider changing lender, I had it in mind that your spread could go lower.Switching lender is quite painful. Moreover, you don’t have much loan left.I mentioned the numbers. There is some savings. However, please understand the analysis makes a number of assumptions that may not hold true.MCLR is clearly more transparent than base rate though.

Thanks Deepesh! I have one more question, I want to pre-pay one of my loan with 3 lacs(Top-up: 9.2% MCLR, 4 yrs remaining, no tax benefit and Home loan – 10.15% base rate, 6.5 yrs remaining, taking tax benefit on it). Which one should I pay first considering I am taking benefit of taxation on my home loan currently. What would be the best option for me. I really appreciate your time and insights on this.

I took Top up loan on Jul 2016 and the interest rate for that was written as current MCLR + 0.8% (revised every year) in the loan document. For the 1st year it was 10.7% MCLR and home loan was at 10.15% base rate. This year I confirmed with them and they said its 9.2% for this year for Topup but home loan is still at 10.15% base rate.

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